Risk Management Options
Risk management is the process of choosing appropriate methods to respond to identified risks, which can include mitigation, transfer, and coping. The risks affecting agricultural supply chains can potentially be managed at different points by different actors. For example, risks may be managed:
- At the micro level, by individual farms and firms, through enterprise strategies and various management practices.
- At a meso level, through joint action with other farmers and firms (such as community networks, farmer groups or cooperatives, and industry associations) and in interaction with other supply chain participants via transactions, contractual arrangements, information flows, and other means, with some distribution or sharing of risk among those players.
- At a macro or external level, where actors outside a specific supply chain—including banks, insurance companies, government agencies, and donor agencies share or absorb part or major elements of the risk through various financial instruments, physical stock-holding, and other means.
The levels of formality in managing risks also vary, from informal arrangements in the form of self-insurance by farms and firms to formal arrangements covering various types of contracting and/or use of financial instruments. Some measures are also publicly mandated or implemented, including mandated (and sometimes subsidized) insurance, credit guarantees, transfers, or public works. Public measures are applied when private arrangements are dysfunctional, are considered to be inappropriate, simply do not exist, or are not sufficient to meet specific policy objectives.
A first strategy to manage a risk is to avoid it. For example, by growing a different crop or even getting involved in a different economic activity. However, not entering a business to avoid the risk of loss also avoids the possibility of earning profits. Elimination of risk is also a possibility, for example, by growing crops under protected agriculture (e.g. greenhouses) to eliminate the effects of weather-related risks. However, when the risk of adverse ‘events’ cannot be avoided or eliminated, the management strategies available to supply-chain actors are either to mitigate, transfer or cope with those risks. Risk mitigation encompasses actions taken to reduce exposure to, severity of, or probability of loss from the event. Risk transfer strategies have as the central logic the transfer of risk from some participants and institutions onto others that might be better able to cope with it (e.g. by purchasing insurance, hedging, etc.). Some argue, that in some cases, for example in the case of insurance, the tool provides compensation if the event occurs, and in most cases, compensates only partially for the losses occurred, with some level of risk retention still occurring by the holder of the insurance policy.
Even when farmers utilize mitigation and transfer strategies, they may still retain some degree of risk exposure. Coping with risks involves accepting the loss, when the event occurs. Thus, risk coping involves activities for facing risks and dealing with resulting losses by, for example, precautionary savings, selling productive assets, seeking temporary employment, and other measures. Learn more about coping strategies.
Multiple strategies are typically combined, because no single approach or instrument can effectively mitigate, transfer, or cope with the broad range of risks encountered. All strategies have different private and public costs and benefits, which could increase or decrease the vulnerability of individual participants and the supply chain. When selecting a mix of risk responses, it is essential to take account of the many linkages between different types of risk management strategies and instruments.