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Learn to manage risks for your agribusiness SME

What can a small producer do if a frost ruins an entire year's harvest? How can a food input export business efficiently adapt to a sudden change in the foreign exchange market? Or what happens if a transporters' strike prevents the distribution of food production and it spoils?

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Published by ConnectAmericas

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Understanding how to answer these questions means knowing how to manage the risks of a business. However, it's not about having the solution for every possible scenario, as that would be an endless task, but about having the capacity and tools to face what deviates from a company's plans.

Having this ability gives an advantage to businesses of any size, but it is crucial for small and medium-sized enterprises (SMEs) due to their greater vulnerability to any type of eventuality.

A simple definition of risk tells us that it is everything that can make things not go as planned.

If we think about the agri-food sector, how many eventualities could deviate our plans? From climatic processes, such as a flood or a drought, to changes in consumption habits or a global pandemic, there is a vast list of risks for agribusinesses.

Thinking about all possible risks for your business can be paralyzing, but the intention is precisely the opposite. That is, so you can know how to manage them.

Comprehensive Risk Management

Risk management is an important component of business management and should be present in all areas (production, marketing, distribution, finance, human resources, etc.). Considering all possible risks and their impact on the business, as well as developing strategies to manage them, is known as comprehensive risk management.

In the case of agribusinesses, the Inter-American Institute for Cooperation on Agriculture (IICA) points out that in the Americas, risk management has focused on response and reconstruction actions to climatic phenomena.

Comprehensive risk management would have to go further, as it would involve generating instruments for risk prevention, mitigation, and transfer, in addition to including all actors, public and private, to work on a consensus strategy.

Types of Risks in Agribusiness

Businesses linked to the agricultural sector face similar risks to businesses in other sectors, as well as specific risks to their sector.

The IICA has established a typology of these risks according to the scope where they occur and has also outlined the adverse effects each one could cause:

Production Risks

It considers natural elements, diseases, pests, and management and technology.

Adverse effects: losses due to decreased production and quality, appearance of pests and diseases, loss of working capital, loss of productive land suitability.

Economic Risks

Price variation.

Adverse effects: fall in profitability, reduction in payment capacity, financial overexposure, lack of liquidity, insolvency.

Human Risks

Work accidents and diseases.

Adverse effects: higher labor costs, legal actions with impacts on equity, losses due to decreased product quality and quantity.

Sociopolitical Risks

Legal changes.

Adverse effects: higher costs, inability to market production.

How to Manage Risks?

Once the risks have been identified, the next step is to develop a management strategy for each of them. Choosing the best management strategy will depend on evaluating the degree of exposure to risk and its severity. Also, consider that the effectiveness of each strategy is subject to various factors, some internal (such as the risk culture in your business), and others external (such as the legal framework and existing public policies).

Identifying different risks does not mean that measures must be taken to face them all at once. In fact, it is more effective and advisable to start with strategies for potential risks with the highest negative impact.

Risks can be:

Avoided or eliminated: Although it may seem like the most desirable strategy, consider that it could involve modifying activities or rethinking an entire operation. Consider this alternative when the risk has a high probability of occurrence and high severity.

Transferred or shared: In this case, an attempt is made to have a third party assume the risk, for example, an insurer. In some cases, the risk can be shared, for example, by making agreements with suppliers or customers so that losses, in case the risk materializes, are assumed by all parties.

Mitigated: This strategy works to reduce the probability or severity of risks. They can be simple activities such as changing suppliers.

Accepted: This strategy means not establishing any measures when the risk occurs. It is suggested if the risk is not very serious, so the repercussions will not be high.

How to know which is the best strategy for risks in your business? To define this, it is important to consider the intensity and frequency of each risk, as well as the possibilities of facing it.

One way to define the best strategy for each risk is these steps, suggested in the IICA Manual:

Evaluate risk factors and channels through which they would affect your business. This requires having the most available information related to the type of risk.

Develop mitigation actions. Think about actions that you, as a producer, can implement. An example could be the active protection of the crop through sprinkler irrigation to reduce the risk of frost or installing anti-hail nets.

One way to mitigate economic risks could be to prepare an agribusiness plan that helps you make decisions and avoid improvisations when facing a risk.

As you can see, mitigation actions require planning. A recommendation for establishing mitigation strategies is to identify risk factors, list the risk-generating sources for each, the consequences, and the preventive measures you can take.

Assume risks that cannot be mitigated or whose mitigation is economically unfeasible.

Transfer risks in cases where there are instruments or actors that allow it. For example, to transfer climatic risks, there are certain protection insurance. In the case of economic risks, such as price volatility, this can be transferred through minimum price contracts or futures contracts.

As part of risk management strategies, especially for mitigation or transfer, consider instruments arising from public policies, such as public insurance, subsidy programs, financial assistance, or emergency funds for the agricultural sector, as well as assistance, regulation, and price support programs and incentives for agricultural diversification.

How to Anticipate Risk?

Part of the preparation to know how to manage risks is to prepare for any eventuality.

Here are some tips, taken from this article published on the ConnectAmericas platform, that will help you anticipate risks:

  1. First, identify the key activities in your company, as well as the objectives and standards for each of these activities.

  2. Identify the key assets of your company, those that, if endangered, could affect business continuity.

  3. Identify all possible sources of risk that could unexpectedly harm or favor the achievement of your objectives.

  4. Calculate the size of the loss you would have if a risk materialized. This knowledge will help you determine if applying a certain strategy will cost you more than the possible loss or impact.

Above all, remember that risks are part of business development. Planning and preparation for possible eventualities are what makes the difference in how they are managed to reduce their impacts.

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