2. Project No: 2017-1-IE01-KA202-025711
This project has been funded with support from the European Commission.
This publication reflects the views only of the author, and the Commission
cannot be held responsible for any use which may be made of the
information contained therein.
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3. What’s in this Module
• Presentation
• Sort the risks
• Measurement and risk management
• Risk and profitability
• Conclusions
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8. MEASUREMENT AND MANAGEMENT
Nº Risk factor Impact Probability Levels
of Risk
Existing Control Causes, conditions and
considerations
Chronology Measurements
A M B
1 Volatility of markets A A High Several organisms carry
out market and futures
evolution controls
There are moments of contraction
of markets or excess production
that must be anticipated and
avoided
It usually occurs
cyclically every three
years
Accumulate and save a% of
the economic annual yield to
be applied in the lower part of
the price cycle.
2 Sanitary aspects of the farm A B Medium Check list Periodically update the checklist
updating it to the latest news of the
productive sector
Punctual events
throughoutthe life of
the farm
Update the management
knowledge of the farm and
train the worker staff.
3 Climatic event: frost out of
season
M A Medium Check farm insurance,
anti-freeze systems.
Frost is a climatic event Every ten years we
are likely to have an
off-season frost
Have updated the insurance
system and well reviewed the
anti-freezing mechanisms of
the farm.
4 Expansion of the farm
through land acquisition on
credit
M M Medium Apply analysis of
investment evaluation,
such as Net Present
Value (NPV)
The farm assumes an economic risk
per investment that may coincide
with some other risk factor
Investments in land
are rarely made.
Go to an investment analyst
and assess the rest of the risks
of the farm before investing.
5 Hiring new staff for farm
management
M A Medium Make hiring through a
specialized agency
Small changes in the farm
management system can cause
yield losses
Every time we
proceed to hire an
employee
Evaluate farm management
based on published indices or
indicators of the sector.
EXAMPLE OF MATRIX AND MAPPING OF RISKS AND CONTROLS
Business risk. The enemy of every investor or entrepreneur is the "risk", the main element of instability in investments, which are nothing more than bets for the future in environments with greater or lesser uncertainty. Every entrepreneur takes risks within his field to be more competitive and satisfy the needs of the consumer / client.
Finalidad de este módulo: Los riesgos que amenazan a una granja agrícola o ganadera son muy numerosos y de naturaleza muy variable. Nos gustaría que al final del presente Módulo el granjero pueda responder:
¿Cuál es el riesgo en mi sector de actividad?
¿Y el riesgo asociado a una determinada granja?
¿Y los aspectos específicos de una explotación familiar?
¿Y cuales son las tradicionales herramientas más sencillas de análisis del riesgo?
El conjunto de riesgos de la granja puede gestionarse de manera espontánea (muchos lo hacen de esta forma). Incluso algún riesgo tampoco se pueden gestionar de manera individual. Para cada tipo de riesgo, es necesaria una visión global, integral y sistematizada que permita adquirir la capacidad de anticipar los eventos desfavorables (riesgos) para obtener un aprovechamiento óptimo de los eventos favorables (oportunidades) que el granjero busca en su gestión diaria.
ROLE OF ADMINISTRATIONS. In the agricultural and livestock sector of the European Union (EU), the Commission plays a fundamental role in determining and controlling the business risks of its farmers and ranchers, together with the governments of the states and regions. But, the professionalization in which livestock and agriculture advances favors and requires the implementation and development of risk management advice systems supported by public administrations.
En este sentido, la Política Agraria Común (PAC) 2014/2020 puso en marcha un servicio de asesoramiento dirigido a los titulares de explotaciones agrarias, así como a forestales y a las pequeñas y medianas empresas (pymes) asentadas en el medio rural de los estados miembros de la UE que lo contemplen en sus Programas de Desarrollo Rural (PDR) (art 12 REGLAMENTO nº 1306/2013). Se trata, de este modo, de fortalecer la labor desarrollada ya por los propios estados y regiones, y de ayudar al sector para que pueda incrementar la competitividad y rentabilidad de sus explotaciones tanto en temas de alimentación como en sanidad animal, vegetal, fertilización orgánica y mineral, así como a mejorar las técnicas disponibles en cultivos y en cría de ganado, entre otras, y reducir en la medida de lo posible los riesgos empresariales de estas actividades.
Este servicio de asesoramiento, que constituye una de las medidas del Programa de Desarrollo Rural (PDR) 2014-2020, se estima que llegue a cientos de miles de titulares de explotaciones agrarias cada año, que podrán solicitar, voluntariamente, los servicios que precisen.
Las entidades de asesoramiento que pueden optar a la prestación de estos servicios deberán desarrollar una actividad estrechamente vinculada a la agrícola, ganadera, agroalimentaria o forestal en relación con las materias objeto de asesoramiento. Además, contarán con los medios materiales y personales adecuados, así como acreditarán una experiencia mínima en labores de asesoramiento, formación, divulgación o mejora técnica en los sectores mencionados.
Este MÓDULO pretende dar a conocer los principales riesgos a los que las explotaciones deben hacer frente, y proporcionar algunos contenidos conceptuales y metodológicos para determinar cómo tratarlos y gestionarlos.
Los objetivos de este programa formativo son:
Dar a conocer la importancia de gestionar los riesgos y su implantación en las explotaciones agrícolas y ganaderas.
Desarrollar habilidades y capacidades, tanto personales como grupales, para entender y gestionar adecuadamente los riesgos de las explotaciones.
Proporcionar una visión amplia de los riesgos que una explotación puede tener que afrontar, así como las formas de gestionarlos y controlarlos.
Aportar herramientas metodológicas y estándares internacionales utilizados para la identificación, evaluación y gestión de riesgos.
Proporcionar una visión de las tendencias de futuro y principales vías de desarrollo actuales de la gestión de riesgos.
Dirigido a agricultores y ganaderos encargados de gestionar una explotación agrícola o ganadera.
Sort the risks. Despite the fact that agriculture and livestock are constantly subjected to climatic events, they do not always receive the risks they deserve, because sometimes there is a lack of risk culture that keeps farmers and herders on constant alert to detect, evaluate and reduce them. . In general, many agricultural and livestock farms close due to excessive exposure to risk and poor management. In a cyclical way, and for a more or less long period of time, in almost all the agricultural and livestock sectors, the farms have to develop their business activity below the economic profitability thresholds. The volatility of prices of agricultural and livestock commodities has come to stay and has been installed in our European agriculture and livestock, already part of our business culture.
From the States, the EU and the Regional Governments, numerous policies and strategies are put in place to minimize the effects of this volatility. But the farmer and ranchers will have to know how to live with it, because the crisis management tools that the European Commission puts at the service of the different sectors of agricultural and livestock activity have been very reduced in the last reforms of the CAP, where the public intervention in the markets was reduced, so that the CAP was accepted as a system of aid to agriculture and livestock without causing discomfort in the negotiations that the World Trade Organization (WTO) carries out to favor world trade in products and services.
The risks of an agricultural or livestock farm can be classified according to whether they are more or less predictable, and / or depending on whether they are more or less controllable and, more importantly, the magnitude of their consequences for the exploitation. Therefore, an important task that must be done by the good farmer and rancher is to make an effort to classify all the risks that may occur in his farm (many of which we will discuss in this Module) in order to analyze them and see how they can address a management of them that guarantees the viability and continuity of the farm. Therefore, it is key to detect the risks, classify them based on their importance and determine management measures for each of them.
The farmer and/or the adviser who provides support must make an effort to order the risks that may be suffered by their exploitation. One possibility to order the risks is to carry out three large groups:
Group 1: Risks of not complying with the policies and regulations (public and private) that govern the activity sector of the operation. What does it consist of? Perform unauthorized actions or irregularities that may be penalized. They are known risks and could be more or less standardized. Everyone knows the extensive regulations that a farmer and rancher must know and abide by on his farm. In many cases they can have access to advisors to help them comply with public and private regulations and regulations.
THESE RISKS ARE KNOWN AND AVOIDABLE through the training of the farmer or rancher and to establish the internal controls and standardized operating procedures. In short, the farmer and rancher has the obligation to know them and try to have zero errors or defects and comprehensive compliance with them.
Group 2: Uncertain but known risks. These are all those risks that the farmer and rancher must assume in order to execute their strategy to generate higher yields. In order to achieve greater financial benefits or productive returns, farmers and ranchers adopt decisions that hope to generate greater benefits. But, often seeking higher returns also implies accepting greater risks. They are direct risks and, sometimes, easily quantifiable (investment on credit) or speculative (new products, change of client to which they supply their production). In this case, the most probable and potentially most damaging risks should be identified and mitigated by monitoring the operation.
THESE RISKS ARE KNOWN AND PREDICTABLE and must be addressed through preventive and never reactive management. The farmer or rancher is obliged to estimate which are the most likely and potentially harmful risks in relation to the management strategy he is following for his farm and adopt a proactive attitude towards them. It is certainly easier to say what must be done, what to really do.
Group 3: Uncertain or unknown risks. Precisely in agriculture and livestock there are many risks of this nature: They are risks from external events, and are not controllable (Brexit, Closure of the Russian Market, Financial crisis of 2007, ...) Are events that farmers and ranchers have no ability to predict nor to generate influence over them. They are uncertain or unknown risks. They are unpredictable and unprecedented events to which we are inherently exposed. They have a low probability of occurring, but can have very adverse consequences.
THEY ARE MORE OR LESS KNOWN AND UNMATCHED RISKS, but some of which are widely known by farmers and ranchers: abnormal natural and / or climate events due to excessive cold, rain, hail, hurricanes, heat, drought, ...; global economic and social phenomena (energy changes, exchange rates, civil insurrections, wars, ...); or sudden changes in the market. It is essential to study the possible effects of this type of risk and its possible ramifications and what should be done to mitigate its consequences. How prepared is the exploitation to face these events? What is the action plan in case they happen? We know that many farmers and ranchers do have a contingency plan for weather events, always unpredictable.
Measurement and risk management. The measurement and management of risks must be an integral part of the process of defining and administering the strategy of the farm. Risk management is part of the hard core of the management of the same that a good farmer or rancher must know and know how to manage, taking into account the high amount of uncertainty that always surrounds the farm.
Knowing the difficulty of measuring a risk, many farmers are able to estimate and assess them, very important aspects when it comes to subsequently proceed with their corresponding management to mitigate or reduce them. Taking into consideration the classification of the risks carried out previously, we establish a series of best practices to reduce the risks.
Group 1: Risks of not complying with the policies and regulations (public and private) that govern the activity sector of the operation. The most known and recognized management measures by all are the following:
Standardize production processes, both in agriculture and livestock, separating properly tasks to make the corresponding checklist. In this area there are numerous checklists for the management of the most abundant agricultural and livestock farms. The main risk of the checklists are the routines. The main virtue is its possible computerization with the high subminister of information that can be transferred to the farmer.
Internal control system monitored by actions. Similar to checklists.
Group 2: Uncertain but known risks: Management measures are more difficult to implement, but there are plenty of mechanisms to manage them. The main difficulty is that the farmer is aware of the need to make good management of these risks, which are identified, but are usually unaware of the possible management tools for them. How can they be managed?:
Identify risks when the farmer initiates a strategy in his company and estimate its possible impact. To estimate and manage the possible impact, the farmer should probably rely on external advisors (financial experts, agronomists, ...) to carry out the analysis of investments, strategies, ..
In some productions there are dashboards of key risk indicators in the management of this type of farm, along with profitable mitigation initiatives. In fact, certain agricultural cooperatives provide these indicator boards to their farmers and analyze in small working groups the three large groups of farms by indicators: good management farms (the head farms), normal management farms, and farms. bad management (those in the queue). At this point, there are those who affirm that the HANDLING that the farmer makes allows some to achieve this higher than the profitability above the average of the group's farmers.
Group 3: Uncertain or unknown risks: These are uncertain risks that we do not know when they can occur. How can we manage them? From some public administrations some highly interesting tool has been placed for its management. Specifically from the Government of Spain has been helping and promoting a system of agricultural insurance (Agroseguros) that has allowed in most agricultural and livestock productions have policies that cover part, or all, of the climatic, health risks, of accidents, ... Well it is true that this supposes a high cost for the exploitation, but also gives the farmer some tranquility in the face of uncertain risks. Also, what can we do?:
Carry out concrete actions to mitigate the possibility of these risks (irrigation systems, anti-freeze systems, ..., hedge funds, ..)
Plan the scenarios where the possible actions that the farm can adopt to mitigate this type of risk are considered.
Measurement and risk management:
One of the tools that the specialists recommend is to use a Matrix and Mapping of Risks and Controls of the Farm. Each farmer must make an effort to write a map of their risks in a matrix. The risk matrix is a way to assess the circumstances that could affect the farm.
Risk Factor: the risk is placed as it is perceived by the farmer.
Impact: H: high; M: medium; L: low. It is scored based on the impact on the farmer's income statement
Probability: H: high; M: medium; L: low. The farmer evaluates and estimates the likelihood that this risk factor could happen on his farm.
Levels of risk: Final assessment based on the value of impact and probability. When the level of risk is low we can ignore it or leave for the end.
Existing control: Indicate if there are means and usually access these means to try to control the risk.
Causes, conditions and considerations: A brief description of the causes of the risk, the conditions in which it occurs and other considerations.
Timeline: average period in which this risk can normally appear and which affects the farm.
Measures: describe the specific measures that the farmer can and should implement to minimize the effects of risk.
ACTIVITY OF THE TEACHER. We understand that an activity of utmost importance to develop in the classroom with the students would be: to elaborate a Risk Matrix of a Farmer that is willing to share their appreciation and valuation of them. It would involve generating a good debate among the students that (if they are from the same sector of activity) would allow them to directly involve them in the execution of a Risk Map of the Sector of a Determined Zone or Region, which each farmer could subsequently adjust to his farm circumstances and your professional level.
Measurement and risk management
Farmers have had a traditional way of managing their economic risks: SHARING THE PROBLEM OF RISKS WITH THE GROUP OF FARMERS AFFECTED IN THEIR ZONE OR REGION.
We commented previously on the importance of farmers agreeing on a general assessment of their main risks, especially those known but uncertain, and we talked about the interesting development of a Risk Map of the Sector of a Determined Zone or Region. When farmers carry out this arduous task of analyzing their risks, regional and state administrations tend to help them in the definition and application of mitigating measures.
The representative entities of the farmers themselves usually take the lead in mitigating measures for some of the risks that sectorally affect a more or less broad group of affected.
The constitution of groups of analysis or debate of the farmers, together with the public or private institutions that provide support services to them, facilitates the preparation of checklists and systems of technical control of the risks that will later help the management individual of them and, what is also very important, the constant improvement of their productivity.
Measurement and risk management
The agri-food cooperatives act as assistant specialists in the risk management of their partner farmers. The reason is that its organizational form is exceptional and very well adapted to their needs. Cooperatives have equal rights and duties that other organizational forms of companies, but it has very significant peculiarities, which must be known by all its partner farmers. In the eyes of the legislator, cooperatives have always had a special consideration and special protection by administrations, which is granted both in fundamental laws and in some ordinary laws. If they have this small protection it is mainly due to the economic and social peculiarities that make them up as an exceptional organization. With respect to exceptionalities we must make clear some issues that emphasize this unique character and adjusted to the interests of farmers:
1.- Because it is a model that works in defense of the incomes of farmers, concentrating the supply of agricultural products and the demand for the supplies of the partners, obtaining for them a greater added value in commercial operations.
2.- Because they are a clear instrument for regulating prices and markets, favoring all farmers and ranchers, including non-members, who use the prices of cooperatives as a reference when making their purchases and sales.
3.- Because they contribute to the business development of rural areas, with cooperative companies that bill billions of euros. In the case of Spain about 30,000 million euros, which have a 100% national capital and the agricultural sector, and whose benefits return to the sector itself and have a direct impact on the rural population.
4.- Because they are companies that never relocate. Cooperatives are always based in rural areas and contribute their means to train and advise partners in business management, food, health, management, seeds, subscribers, phytosanitary treatments…
5.- Because they make it possible to set the rural population, providing coverage in Spain to more than 1,000,000 farmers and ranchers, and maintain more than 100,000 direct jobs, and many others indirectly in the sectors of transport, construction and services.
6.- Because they guarantee with their veterinary and agronomic services, quality and food safety, fruit of the traceability of their products, which always come from the same farms and do not vary depending on campaigns or prices.
7.- Because they have a special interest in defending their environment, training their members in non-polluting practices and carrying out work to collect phytosanitary and zoosanitary packaging waste and protecting common fauna and flora, fostering a sustainable balance.
8.- Because they are companies that have a totally democratic functioning in decision-making and in their structure and management, and can not make any kind of discrimination when it comes to admitting partners.
9.- Because the benefits to the partners are not distributed according to the contributed capital, but in function of the cooperativized activity that is carried out; and because, in Spain, at least 20% of these benefits are given to a Mandatory Reserve Fund that is irreparable in case of dissolution, and 5% to training topics.
10.- Because there is no other model so involved with the rural environment, or as socially responsible, as the cooperative model.
For all the above, cooperatives are the practical system adopted by farmers in Europe to try to control and manage the risks to which they are constantly subjected.
The family, the property of the land and the farmer
Much of the farms in the European Union (EU) are managed by families who own a part of the land more or less important. For several decades there has been a clear tendency to reduce the number of farms in the EU countries and, at the same time, to increase their average size. In this sense, depending on the member states and the sectors, we are faced with a growing presence of companies that manage the land of several owners. In parallel, we also find farmers who manage more and more land that is not their property, through a lease system or similar. Because a special characteristic of almost all the activities of the farmers is the need to have the land resource as an essential element for the development of the farm. Therefore, the farmer must manage an unusual element in other types of companies and companies: the land. At this point, in different parts of the EU there is the circumstance of the attachment to the land of their owners, since many of them have among their ancestors farmers who have cultivated it.
We understand that the familiar character and the management of the natural resource essential ground for a farm, deserves special consideration in this module related to business risks.
In the farms we have three key elements to consider: the family, the business and the property. In some cases the family is the manager of the farm and several members of the farm work there. The farm usually has a single owner: father or mother, son or daughter, ... and directly manager of the risks that may arise in its activity. And the ownership of the lands can be of several members of the family and even of members that are not of the family, in the case of the land of rent. There are, therefore, three sources of risks: risks of family governance, risks of business management, succession, administration of property and property.
Family governance risk: They are related to the family unit, shared values, harmony, traditions, beliefs and culture, to mention a few factors. An unexpected illness, the death of one of its members, conflicts between the family (between siblings, between father and son, ...), differences, generational rivalry, ... are some of the situations that impact on the family system. In the way to address these issues, the prevention of the family system will be taken care of and ties will be strengthened. If not, some of the parts of said scheme (family, company, assets) will be permanently affected. A large percentage of the disappearance of farms is due to internal crises of the family members that comprise it.
Risks of business management: These are the risks discussed in the previous slides.
Risks of the administration of the patrimony: Disagreements on the direction of the business, legal changes, familiar conflicts by the economic crisis of some member, ... can affect the administration of the familiar patrimony, and therefore to the farm.
Property risk: We refer to the risks of decisions related to the economic participation in the farm, the system of distribution of benefits, and those related to the structure of the property. A scattered property coupled with a lack of skills among family members to work together impact the viability of the farm.
Succession risks: Closely linked with family businesses. These risks are inherent to family businesses and are directly related to the succession in the direction or leadership of the farm. The sudden withdrawal of the owner due to illness, death, disability or volunteer is one of the most important factors. Is there a succession plan? Is there a profile of the successor and next farmer? Are scenarios planned in case of lack of the leading farmer)
These are aspects that the farmer, together with his family, must anticipate and have a response plan for each of the assumptions, considering that each farm is unique, with its own processes, philosophy, vision and work organization.
Risk, profitability and management
The agricultural and livestock production is very exposed to the possible negative effects of a series of factors that present a very high degree of variability. Climatic, biological, institutional, human and market factors affect the performance and price of products and supplies. These factors are responsible for the economic risk to which any company is exposed, whatever the way it is financed, and which can cause large losses in a short time.
On the other hand, financial risk refers to the possibility, sometimes uncertain, that the farmer can not meet his financial obligations (payment of interest and amortization of debts), which may affect the farm's viability. . Both risks are intimately linked, since the possibility of meeting financial obligations depends to a large extent on the productive capacity of the company.
Both the economic risk analysis and the financial risk are of great interest to be applied in the larger professionalized farms that seek profit maximization.
Contrary to what happens in other areas of the economy, it is not common for farms to use risk management systems, for several reasons: ignorance of the available tools, because they are small companies, believing that they are difficult to apply , cost that does not justify the benefits that could be reported, the fact that the risk can only be mitigated but not eliminated, etc. However, farms, by their very nature, are very exposed to potential negative effects, derived from a series of factors that present a very high variability, as we have already mentioned. But these factors do not stop being economic factors, and any company must face them, whatever the corporate way of organizing.
Both economic risk and financial risk should be managed through suitable instruments that reduce exposure to these factors, not eliminate them because it is impossible. Farmers can have tools that are easy to apply and are developed from the financial statements: income statement and balance sheet of the farm, so it is essential that there is a good accounting of the activities of the farm.
Tools: analysis of the variability of economic and financial profitability based on historical records. Another important method is the analysis of economic leverage and financial leverage, based on the analysis of the cost structure and the financial structure. Based on this analysis, indicators are estimated that make possible the identification of the possible effects that variations of these structures can have on economic results. It is essential that farmers with high economic volumes in their movements know and have these tools to improve the business of their farm, know their investment possibilities and growth, their ability to access external sources of financing without compromising their stability financial and their possibilities of extracting the maximum benefit from their effort on the farm.
Conclusions
The risks are very present in the management of a farm, whatever its activity. Precisely the farmers are the entrepreneurs who bear the greatest number of risks when working with natural resources and exposed to the weather and the changing conditions of nature. In addition, a characteristic of the farmers is that they are small businessmen away from the big business centers where professionals of economic and financial analysis abound.
From the EU Commission itself, through its Common Agricultural Policy and with the collaboration of the governments of the states and regions, a tool has been made available to the farmer to help him manage his risks and improve the yields of his farm. In addition, the aid to the hectare that farmers and livestock farmers receive, together with the coupled subsidies that make up the first pillar of the CAP and the aid of the second pillar of the CAP mean that the economic and investment risks are not so extreme.
One of the most important actions that farmers should do is make an effort to know their risks, knowing all the types and types of risks that may occur throughout the life of the farm. It must recognize risks that are due to unwise actions, due to uncertain events and even to assess risks due to unpredictable events.
Once each farmer identifies their most important risks, we have seen that they must know that the vast majority of risks have management tools and must assess which of the tools can and should apply to the risks of their farm according to their type.
Ideally, each farmer should have a risk map made by him with the mitigation measures that he puts in place to reduce the possible effects. A risk map allows periodic review and constant updating. The information and communication technologies together with the greater knowledge of the productions facilitates the monitoring of the farms.
Of course it helps farmers to analyze their risks that they support on their farms in a shared way. A shared and comparative vision encourages the farmer to address the different methods and tools of mitigation, as well as participate in a process of continuous improvement of profitability of their farms and enable the support of public administrations.
Of course, we had to review the role of agri-food cooperatives and their special organizational characteristics to know what they can do in the field of farm risks, and their collaboration to control and reduce them.
He could not leave without analyzing the special organizational and social characteristics of the small farmer, closely related to his family and the land they cultivate and the special participation of the family in the good running of the farm. So many farms survive if there is adequate management of the family component and the property they have.
Finally, thinking especially about large farms, there is an analysis of economic and financial risks in the same way as any other company. For this it is essential to have a good accounting and accounting data for several years of the farm.
