Risk mitigation and management for agribusiness investment investment and resource mobilization

1. Risk Mitigation and Management
for Agribusiness Investment
Investment and Resource Mobilization
Aurup Ratan Dhar
MS in Agricultural Economics (Production Economics)
ID: 15AEP-JD26M

2. Risk
A probability or threat of damage, injury, liability, loss, or
any other negative occurrence that is caused by external
or internal vulnerabilities, and that may be avoided
through preemptive action.
Financially, the probability that an actual return on
an investment will be lower than the expected return.

3. Vulnerability constraints
Operational constraints
Capacity constraints
Political and regulatory constraints
Key Challenges for Rural Agribusiness
Financial Service Provision

4. Vulnerability Constraints
Systemic risk
- Adverse climate condition
- Outbreak of diseases
Market risk
- Cyclical and seasonal price fluctuation
- Import/export restrictions
Credit risk
- Lack of agricultural credit disbursing institutions
- Costly and lengthy registration procedures
- Lack of collateral

5. Investment returns and capital flows
- Slower revolving of rural capital
- The return from investment capital is even
slower
Low investment and assets
- Lower asset cushion
- Unavailability of asset creditors
Geographical dispersion
- Remote rural areas
- Heterogeneity among communities
Operational Constraints

6. Capacity Constraints
Infrastructural capacity
- Poor communication system
- Missing social and health services
Technical capacity
- Unskilled rural population
Social exclusion
- cultural, gender, religious and educational constraints
Institutional capacity
- Outreach and management capacity
- Risk-bearing capacity

7. Political and social interference
- Forgiven loans
- Withheld savings
- Capped interest rate
- Useless mortgages
- Suspended payments
Regulatory issues
- Land tenure regulations
- Banking laws
- Exchange rate manipulation
- Tax considerations
Political and Regulatory Constraints

8. Risk Management
Retain
- No protection
Shift
- Transferring own risk to someone else with agreement
Reduce
- Having good knowledge, technology and management
Self-insure
- Having adequate reserves
Avoid
- Maintaining low debt-asset ratios

9. Storage
- A way of avoiding seasonally low prices
- A warranty of realistic expectation of increasing
market price in future
Cash sale
- When market price is favorable
Fixed price contract for differed delivery
- Cash forward contract
- Allows producers to establish a price for later
delivery
Agribusiness Risk Management Tools

10. Agribusiness Risk Management Tools (cont…)
Basis contract
- The difference between local cash price and future
contract price
- More stable and predictable
- Changes in response to local demand and supply factors
Deferred price contract
- Transferring the title of crop to the buyer at delivery but
allows the seller to set the price later
- Commonly is used when storage is tight

11. Minimum price contract
- Establishes a floor price for the duration of
the contract
- Eliminates downside price risk
Crop insurance
- Insurance premium for crop
- Ensures reliable level of cash flow
- Allows flexibility in marketing plans
Agribusiness Risk Management Tools (cont…)

12. Financial Risk Management in Rural Agribusiness
Financial risk management
- Cost and availability of debt capital
- Ability to meet cash flow needs in a timely manner
- Ability to grow and maintain equity
Country, currency and interest rate risk
- Governmental macroeconomic policies
- Fiscal and trade policies
- Capital market instruments

13. Investment in public goods
- Address risk reduction in money investment
- Seldom designed explicitly to target the risk
- Includes public goods produced by
investment in public research agencies
- Investment in irrigation project, veterinary
and human vaccine development, etc.
Risk Mitigation Approaches

14. Risk Mitigation Approaches (cont…)
Investment in capacity building
- Financial institutional capacity
- Producer and client capacity
- Commodity exchange capacity
- Grades and standards

15. Developing an appropriate policy framework
- Transparent and suitable financial policies
- To remove historical biases against
agriculture
- To help the sector become profitable
- To encourage investment
Improving the Financing Environment for
Rural Agribusiness

16. Improving the Financing Environment for
Rural Agribusiness (cont…)
Future directions for risk mitigation
- Strengthening rural financial services
- Improving information systems
- Testing new approach of agricultural insurance
- Promoting market-based price risk management
- Use of cash transfers and safety net programs
- Emphasizing disaster-risk planning

17. THANKS TO
ALL