Home: Agricultural Economics: RISK MANAGEMENT
About our risk management project
by Johan Stander
The objective of the risk management project is to develop and implement a framework to help farmers stabilise their income amid various risk factors.
Risk is not a phenomenon that is unique to the agricultural sector of the economy. However, the agricultural sector is faced with a combination of risk variables that is very seldom found in the same blend in any other sector.
This combination of risks associated with agriculture include:
- climatic or natural risk: drought, floods, rain at the wrong time, hail, wind, heat, fire, frost;
- market risk: changes in consumer preferences, price fluctuations, transport costs, over-supply;
- policy risk: changes in tariff regime, marketing arrangements, fiscal policy, trade policy;
- social risk: labour action, personal circumstances; and
- macro-economic environmental risk: changes in technology, farming practices, demography.
It is true that some of these risks are insurable, albeit at a high cost, but it is equally true that other risk variables are not insurable.
The effects of some risk variables are instantly recognisable (flood & fire damage), while the effects of others are only visible over the short to medium term (drought). It is even true that the effect of some other risk variables will only be visible over the medium to long term (changes in consumer preferences and technology).
It is important to take note that it is not only the farmers themselves who are affected by the effects of risk. It was conclusively shown by Berning et al (1999) that those affected most by changes in agricultural conditions are the rural poor.
It follows that there is room for a system through which farmers can hedge themselves against these uninsurable risk variables, especially in the case of variables whose effect are not immediately visible and where structural adjustments are required from the farmer.
In a number of countries, including the EU and Japan, the government, through elaborate safety-net programmes, relegate the farmer to a passive role in this regard.
In the case of South Africa, as member of the Cairns-group and within a non-interventionist policy framework, farmers are required to fulfil a more active role. This does not mean that government has no role to play, but rather that government can create the right environment in which farmers can take responsibility for their own actions.
One way of creating this environment is through developing a framework that farmers can use to make provision in “good” years for the “bad” years that we all know will come. Or, in other words, a framework used for income stabilisation.
The objective of the risk management project is therefore the development and implementation of such a framework to stabilise income amid various risk factors.
