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Planning for contingencies fundamental in agribusiness

2019-10-01  Staff Reporter

Planning for contingencies fundamental in agribusiness
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Emilie Abraham

Globalization and climate change present new challenges in the way in which farmers operate their farming businesses. Operating a farming enterprise has become riskier than ever due to abiotic and biotic stress factors presented by climate variations as well as intense competition in global markets (the world has become a global village). 

It is therefore crucial that farm managers develop new strategies to survive and plan for contingencies to ease the burden of uncertainties or disruptions to ensure farm survival and sustainability. Moreover, being reactive and waiting for problems to occur will not suffice and can be detrimental to the farming business.

Planning for contingencies will be necessary to prevent and prepare to effectively respond to uncertainties and emergencies. To this end, farmers are advised to factor in risk-bearing costs when budgeting or determining their operational costs. It is also imperative to make provision for savings after every sale to sustain the enterprise during hard times. In a nutshell, all farming revenue is derived from the sale of farm produce (livestock or crop sales) and a profitable farm must be able to sustain its operating costs. This article seeks to articulate critical areas that farmers should focus on when planning for contingencies in a farming business.

Risks related to farming business farm risks can derive from human or natural factors. It is common knowledge that the profitability of a farming enterprise and the cash flows it generates are affected by variations in weather patterns. Low rainfall patterns and high temperatures for any sustained period can result in severe losses and the halting of farming operations. Moreover, farm revenue can be affected by numerous climate-related factors over which farmers have no control, including pest and disease outbreaks (e.g. African armyworms in crops, Newcastle in poultry etc.), reduced water tables, lack of grazing pasture, a decline in cattle market prices (due to emaciated conditions) etc. Farmers are therefore advised to devise strategies and develop a backup plan to lessen the burden during such testing times.

It is therefore advisable for farmers to identify existing risks as well as emerging and possible future risks that can cripple their farming operations and develop a backup plan for unexpected contingencies. Plans can include the planting of fodder plants, reducing stocking rates and diversifying farming operations by adopting complementary enterprises e.g. poultry farming, piggery to support the main enterprise.

Despite climate change risk factors, there are other risks that farmers should take note of such as the adoption of new technologies that can be too expensive with a minimum return on investment and a bad reputation as a result of selling poor quality or zero graded products (reputational risk). Furthermore, noncompliance to existing laws and regulations can be a source of risk too, such as feeding animal products to animals (prohibited) and failing to return a movement permit etc. 

Moreover, the inefficient utilization of resources and inputs that result in high production costs and low output (operational risk) can present a huge risk to a farming enterprise. In addition, the lack of financial discipline can result in poor cash flow management, financial misstatement and the inability to honour farm credit repayment. Farmers are therefore advised to prevent and prepare to manage risks should they occur.

Prepare and prevent A “what if” plan should be in place as part of risk preparedness. The following factors amongst others can be considered when developing risk preparedness strategies:

– The allocation of resources is a pre-requisite to cater for emergencies; therefore, farmers should budget for uncertainties and emergencies. Thus, after-sale saving is recommended to ensure farmers have backup resources during contingency situations.

– To operate efficient and competitive farming enterprises, farmworkers should be equipped in terms of knowledge and skills (capacitated) to minimize unnecessary losses (e.g. how to vaccinate and treat, handling of produce etc.). Famers should also prioritize Personal Protective Equipment (PPE) for farmworkers to avoid losing good workers due to injuries and health issues etc.

– It is imperative to comply with all existing regulations and laws in place that concern your farming enterprise to avoid disappointment and cash flow disruptions. Farmers are therefore advised to consult and seek information from relevant authorities regarding regulations and laws to be adhered concerning the farm enterprise of choice.

– Financial discipline is key to avoid credit risk. Payback your loan and honour your instalments at all times, particularly in good years, so that in the event of droughts/hard times the bank will sympathize with you. In fact, good credit records put you in a better position to acquire quick financial assistance during emergencies.

– To curb market risk, farmers should prioritize market analysis to understand market dynamics e.g. market flooding, consumer’s perceptions, needs, and any other market aspect that can delay sales and reduce profit margins etc.

– Importantly, producers should assign tasks and responsibilities to individual farmworkers to ensure accountability in the event of emergencies (workers should know their respective roles to avoid blame games).

 In conclusion, farmers should be risk managers and not risk-averse. Therefore anticipation of what may happen, coupled with the prior allocation of financial resources, is assumed to maximize the chances of a successful response in the event of a crisis such as a drought. 

Farmers are also advised to keep the backup plan up to date by frequently consulting with the nearest Ministry of Agriculture, Water and Forestry (DVS & DAPEES) office and other relevant offices on new developments regarding farming and potential risks prevalent in your area related to your farming enterprise of choice.

*  This article was compiled by Ms Emilie Abraham, Technical Officer within Agribank’s Agri Advisory Services Division.

2019-10-01  Staff Reporter

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