Risks and Exposures
An Abundant Array of Risks and Exposures
In agriculture, a risk is the possibility that an event will occur and have a negative impact on the achievement of a farm’s or firm’s performance objectives, which can also harm the functioning of the overall supply chain. The sources of risk in agriculture are multiple and diverse, ranging from broad risks associated with the macroeconomic, financial, or business environment to risks that are more specific to agriculture. The table below identifies some of the different types of risk that may be encountered.
Risky events can be characterized by their magnitude, scope or spread, frequency and duration, and/or their history—all of which can affect a farm’s or firm’s vulnerability. A critical dimension in the characterization of risks is their systemic nature. For example, micro-risk events known as idiosyncratic risky events affect individual farms or firms (examples include plant and animal pests and diseases or the illness of the owner or laborers). Covariate risky events affect many farms and firms simultaneously (examples include major droughts, floods, or fluctuating market prices) either at the community level (meso level) or across an entire region or country (macro level). Covariate shocks, arising from war, natural disasters, price instability, or financial crises, are difficult to manage locally and require a coordinated external response. Thus an individual farmer or firm may face very different risks at the same time, with different levels of exposure and capacities to respond and adapt to them.
|Types of Risks||Examples|
|Weather-related||Periodic deficit and/or excess rainfall or temperature, hail storms, strong winds, etc.|
|Natural Disasters (including Extreme Weather Events)||Major floods and droughts, hurricanes, cyclones, typhoons, earthquakes, volcanic activity, etc.|
|Biological & Environmental||Crop and livestock pests and diseases, contamination related to poor sanitation, human contamination and illnesses which compromise the product’s safety and/or labor availability, contamination and degradation of natural resources and environment which affect agricultural production and safety, etc—Risks resulting from pollution, climate change or to the management of natural resources such as water can be considered as ordinary or extraordinary (calamity) depending on their frequency and the extent of the losses, and vary according to natural conditions, farm structures and production practices.|
|Market-Related||Changes in supply and/or demand that impact domestic and/or international prices of inputs and/or outputs, changes in market demands for quantity and/or quality attributes, changes in food safety requirements, changes in market demands for timing of product delivery, changes in enterprise/supply chain reputation and dependability.|
|Logistical & Infrastructural||Changes in transport, communication, energy costs, degraded and/or undependable transport, communication, energy infrastructure, physical destruction, conflicts, labor disputes affecting transport, communications, energy infrastructure and services.|
|Management & Operational||Poor management decisions in asset allocation and livelihood/enterprise selection, poor decision making in use of inputs, poor quality control, forecast and planning errors, breakdowns in farm or firm equipment, use of outdated seeds, not prepared to change product, process, markets, inability to adapt to changes in cash and labor flows, etc.|
|Policy Institutional||Changing and/or uncertain monetary, fiscal and tax policies, changing and/or uncertain financial (credit, savings, insurance) policies, changing and/or uncertain regulatory and legal policies, and enforcement, changing and/or uncertain trade and market policies, changing and/or uncertain land policies and tenure system, governance related uncertainty (e.g., corruption), weak institutional capacity to implement regulatory mandates.|
|Political||Security-related risks and uncertainty (e.g. threats to property and/or life) associated with politico-social instability within a country or in neighboring countries. Interruption of trade due to disputes with other countries. Nationalization/confiscation of assets, especially for foreign investors.|
Assessing risks systematically and comprehensively
Before focusing on specific instruments to manage risks, decision-makers and agricultural supply chain participants need to assess risk systematically and comprehensively. A critical factor in this assessment is the understanding of the level of exposure to specific risks. The exposure of enterprises (including farmers) to risk depends on various factors, notably their assets, their allocation of those assets, and their livelihood/enterprise selection. By combining the likelihood of risk, risk exposure, and the severity of events, it is possible to estimate expected losses for the different participants in the supply chain as well as the cumulative losses throughout the chain.
For most commodities, certain risks are more prominent than others. The relative importance of a given risk should affect the relative emphasis given to different types of quantitative and qualitative analysis during the risk assessment. For example, the volatility of international market prices (including periodic sharp downturns in those prices) is a prominent source of risk for producers and traders of most grain and oilseed commodities and traditional beverage and industrial crops. On the other hand, for some industrial crops and for a range of perishable, higher-value products, price risk by itself is a less important risk, and the higher-order risks are more commonly related to logistics and compliance with food safety and/or plant/animal health requirements.
A wide set of methodologies has been used to assess risks related to a wide range of issues. For example:
- Household, or area-based, risk assessments typically focus on the vulnerability of different types of households, the application of (typically) informal mechanisms for sharing and coping with risks, and the need/scope for supplementary social protection measures.
- Hazard vulnerability assessments typically highlight the potential exposure of national infrastructure and major population groups to natural disasters such as earthquakes, hurricanes, other extreme weather events.
- Financial risk assessments focus on possible budgetary and other macroeconomic impacts of major “shocks.”
- Rapid Agricultural Supply Chain risk assessment, a methodology developed by the World Bank Agricultural Risk Management Team, provides guidance for systematically assessing risk and vulnerability within agricultural supply chains. The methodology is designed to help decision makers understand the risk exposure of agricultural supply chain participants and to identify risk management strategies for selected commodity systems.