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Agricultural Sector Risk Management

AgRisk FrameworkTo help the development of national level agricultural risk management frameworks, ARMT provides clients with technical assistance (TA) and capacity building services. ARMT’s approach to development of risk management frameworks typically involves the following sequence:

Risks Assessment and Prioritization: This involves analysis of the three principle types of agricultural risks and their prioritization, based on probability of occurrence and severity of losses.

1. Production Risks: Weather events (droughts, floods, hurricane, cyclone, sudden drop or increase of temperature, frost etc), pest and disease outbreaks, bush fire, windstorm etc are major risks that lead to production volatility and livestock morbidity.

2. Market Risks: Risks like commodity and input price volatility, exchange rate and interest rate volatility, counterparty/default risks usually materialize at the market level but have backward linkages to the farm gate, thereby affecting all stakeholders.

3. Enabling Environment Risk: Changes in Government or business regulations, macro-economic environment, political risks, conflict, trade restrictions, etc are major enabling environment risks that lead to financial losses.

Stakeholders’ Assessment: Analysis of the role of different stakeholders across the agricultural sector and understanding of their risk management capacity. For simplicity, the sector is analyzed across 3 layers:

2. Commercial sector stakeholders (Meso): Commercial stakeholders, including traders, middlemen, wholesalers/retailers, financial institutions, input providers, etc.

3. Public sector (Macro): Public sector institutions, parastatals, Government and donors.

Risk Management Strategies: The principle strategies to manage agricultural risks could be classified into:

1. Mitigation – Activities designed to reduce the likelihood of an adverse event or reduce the severity of actual losses. Risk mitigation options are numerous and varied (e.g., Irrigation; use of resistant seeds; improved early warning systems; and adoption of better agronomic practices).

2. Transfer – This entails the transfer of risk to a willing party, for a fee or premium. Commercial insurance and hedging are the well-known forms of risk transfer.

3. Coping – This involves improving the resilience to withstand and cope with events, through ex-ante preparation. Examples include social safety net programs, buffer funds, savings, strategic reserves, contingent financing, etc.

A risk layering approach, based on the probability of occurrence and potential losses, is used to select an appropriate risk management strategy.

Implementation Instruments: Translating risk management strategies into concrete action requires deployment of several instruments which can be classified under:

1. Agricultural Investments: Financial investments in irrigation infrastructure, drought and pest tolerant seed varieties, soil and water conservation, weather infrastructure, or investment in improving systems (e.g. agriculture extension system or disease surveillance system).

2. Technical Assistance: These are geared towards building capacity of local stakeholders (e.g. training in price risk management; feasibility studies for various instruments; flood risk modeling work; developing early warning systems, etc).

3. Policy support: Improved risk management might entail policy reform (e.g. changes in policy to improve access to agricultural inputs; change in information policy to make weather information easily accessible to all; Government procurement, storage, and grains release policies to manage strategic reserves).

Development Outcome: Adoption of agricultural risk management frameworks by client countries could lead to improved resilience and reduced vulnerability of the agricultural sector. ARMT helps client countries develop such frameworks through its TA activities with the following concrete outcomes:

• Overall analysis identifying main risks and solutions, including roles of different stakeholders in risk management.

• List of investments, TA and policy issues needed to implement the framework.

• Filtering mechanism to help prioritize interventions.

• Institutional framework (developed with the client) to operationalize the risk management strategy.

Risk Layering

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