PARM, CD1 handbook

CHAPTER 01

Understanding risk in agriculture

HANDBOOK

Platform for Agricultural Risk Management Managing risks to improve farmers’ livelihoods

CAPACITY DEVELOPMENT

01

MANAGING RISKS AT FARM LEVEL

Handbook

Notes:

Platform for Agricultural Risk Management | Managing risks to improve farmers’ livelihoods

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Platform for Agricultural Risk Management

Managing risks to improve farmers’ livelihoods

What is this Handbook This Handbook is the reference book for the participants of Agricultural Risk Management (ARM) courses.

It provides the basic framework, through key concepts and examples, to facilitate the learning on how to assess and manage risks at farm level.

How to use the Handbook The Handbook is divided into chapters that address the main themes.

Each chapter is divided into sessions that isolate the key concepts.

At the end of each chapter, there are exercises and learning activities to conduct in the classroom to test the knowledge acquired by the participants.

Throughout the Handbook you will find icons that help you to easily identify the key concepts within each lesson.

Legenda



keywords



explanation



exercise



country case study

`

tools

glossary

Advanced concepts to be used to deepen the understanding

Alphabetical list of words related to main concepts

Main words to memorize

A rationale and detailed description of concept

To test your acquired knowledge

To be developed by the trainer based on country’s facts and information



definition

S

example



group discussion

+

key points

A brief definition of concept

A visual rapresentation of concept

To share with your peers experiences and knowledge

Concept to pin point

CHAPTER 01

Understanding risk in agriculture

HANDBOOK

About PARM The Platform for Agricultural Risk Management (PARM) is a global initiative focused on making risk management an integral part of policy planning and implementation in the agricultural sector in developing countries. This facility is a mandate of the G8 and G20 discussions on food security and agricultural growth, supported by a multi-stakeholder partnership between the European Commission (EC), the French Development Agency (AFD), the Italian Development Cooperation (DGCS) the International Fund for Agricultural Development (IFAD), the German Cooperation (BMZ/KfW). In Africa the platform has developed a strategic partnership with the New Partnership for Africa’s Development (NEPAD) and operates within the Comprehensive Africa Agriculture Development Programme (CAADP) framework.

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Managing risks at farm level

MANUAL

Table of contents Chapter 1

Understanding risk in agriculture.....................................................................8 Session 1: What is a risk?....................................................................................................................... 10 Session 2: What are the risks at farm level and their characteristics?............................11 Session 3: What are the farmers’ preferences and approaches regarding risk?......12 Session 4: What is agricultural risk management?..................................................................13 Session 5: What is a holistic approach to risk?......................................................................... 14 Exercise 1.1 and 1.2......................................................................................................................................16 Group discussion 1.1...................................................................................................................................17 Group discussion 1.2..................................................................................................................................18 Country case study 1.1 ..........................................................................................................................179

Chapter 2

Risk assessment at farm level...................................................................................... 20 Session 1: What are the basic elements for assessment of risks?....................................22 Session 2: Information needs and types.......................................................................................23 Session 3: How to measure risks and impacts.......................................................................... 24 Session 4: Prioritization of the risks................................................................................................25 Session 5. Prepare your own risk assessment........................................................................... 26 Exercise 2.1....................................................................................................................................................28 Exercise 2.2.................................................................................................................................................. 29 Group discussion 2.1................................................................................................................................ 30 Group discussion 2.2.................................................................................................................................31 Group work 2.3...........................................................................................................................................32 Country case study 2.1............................................................................................................................33

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Platform for Agricultural Risk Management | Managing risks to improve farmers’ livelihoods

MANUAL

Managing risks at farm level

Chapter 3

Identification of risk management tools................................................ 34 Session 1: How to deal with risks...................................................................................................... 36 Session 2: Risk mitigation.....................................................................................................................37 Session 3: Risk transfer......................................................................................................................... 38 Session 4: Risk coping........................................................................................................................... 39 Exercise 3.1................................................................................................................................................... 42 Exercise 3.2................................................................................................................................................. 43 Group discussion 3.1................................................................................................................................44 Group discussion 3.2............................................................................................................................... 45

Chapter 4

ARM strategy and monitoring................................................................................ 46 Session 1: ARM strategy........................................................................................................................ 48 Session 2: Tool monitoring activities............................................................................................. 49 Exercise 4.1................................................................................................................................................... 50 Exercise 4.2..................................................................................................................................................52 Group discussion 4.1.................................................................................................................................53 Group discussion 4.2...............................................................................................................................53

Glossary.......................................................................................................................................................................54

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CHAPTER 01

Understanding risk in agriculture

HANDBOOK

Chapter 01

Understanding risk in agriculture

Notes:

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Platform for Agricultural Risk Management | Managing risks to improve farmers’ livelihoods

CHAPTER 01

Understanding risk in agriculture

HANDBOOK

Learning objectives SESSION 01 What is a risk?

SESSION 02 What are the risks at farm level and their characteristics?

SESSION 03 What are farmers’ preferences and approaches regarding risk?

SESSION 04 What is agricultural risk management?

SESSION 05 What is a holistic approach to risk?

R keywords

Risk Notes:

Losses

Uncertain event

Constraints

Agricultural Risk Management (ARM)

Holistic approach

ARM stakeholders

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CHAPTER 01

Understanding risk in agriculture

HANDBOOK

SESSION 01

What is a risk?  

S

Definition

A risk is an UNCERTAIN EVENT, results of natural hazards and man-made activities, that leads to physical and monetary LOSSES. Explanation

A risk is an event that may have negative consequences on farming activities.

It can be both natural or human-made.

We do not know when it is going to happen and the exact damage in terms of crop production or money losses.

Risk is different from a Constraint that is a condition or impediment that you know when and how is affecting you.

Example

A drought in Sunnyland has negatively affected the availability of water for irrigation for maize bringing down the yields during the harvesting by 50%.

Notes:

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CHAPTER 01

Understanding risk in agriculture

HANDBOOK

SESSION 02

Which are the risks at farm level and their characteristics?  

Definition

Farmers face different types of risks such as: production risks, market risks, financial risks, institutional risks and human risks.

Explanation

Production risks are all the hazards that can lower the quantity and quality of farming outputs (both crops and livestock).

Production risks

RISKS

• Weather-related risks • Natural disasters • Biological and Environmental risks

S

ACTIVITY RISKS

Market risks are related to inputs and outputs availability and price changes.

They can also include risks due to poor skills in the management of the farm and marketing activities.

Market risks

Human risks are personal circumstances such as migration, illness or death of household’s members or farming workers affecting farming business.

Financial risk are linked to credit access and can be caused by uncertainty of interest rate, credit provision and farmers ability to repay.

Human risks

• market related risks • management and operational risks

• labour risks • health risks

Financial risks

• financial market instability • access to credit risks

Institutional risks occur when unexpected changes negatively impact access to services, infrastructures and government policies linked to farming activities.

Institutional risks

• policy and political risks • infrastructural risks

Example

Farmer Tom faces different risks at different level of his farming activity

1

2

3

4

Planting low quality inputs fake inputs

Growing drought,floods, pest and disease

Storing post-harvest losses, limited capacity

Selling low prices, poor access to market

Notes:

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CHAPTER 01

Understanding risk in agriculture

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SESSION 03

Which are farmers’ risk preferences? 

Definition



Explanation

There are different ways in which farmers can deal with risks.

Risk Taker individual is open to adopt and invest more into risk management options that can bring more gain.

T S

Risk adverse individual is more cautious that prefers to adopting more a protective behaviour.

A

Risk Taker

Risk Neutral individual that is in a neutral position between risk taker and risk adverse.

Risk Advers

N

Risk Neutral

Example

Farmer Tom faces different risks at different level of his farming activity.

Farmers’ characteristics influencing the way agricultural risks are managed:

• household characteristics • past experiences

• farm size/assets • farm type (commercial vs subsistence)

• presence of other sources of incomes

Notes:

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CHAPTER 01

Understanding risk in agriculture

HANDBOOK

SESSION 04

What is Agricultural Risk Management? 

Definition



Explanation

Agricultural risk management, abbreviated with ARM, is a process that consists in anticipating potential risks and planning solutions to limit their negative consequences.

Farmers need to carefully evaluate the solutions to adopt which costs should not be higher than possible losses caused by the negative event. The measures can be ex-ante or ex-post:

Ex-Ante Measures Before the negative event occurs

S

Diversificate

Using savings

NEGATIVE EVENT

Ex-Post Measures After the negative event occurs

Example

Farmer Tom faces different risks at different level of his farming activity.

He needs to follow 5 steps to manage agricultural risks:

Monitor tools and results

Implement risk management tools

Identify risks

Assess risks

Identify tools to manage risks

Notes:

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CHAPTER 01

Understanding risk in agriculture

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SESSION 05

What is an holistic approach to risk? 

Definition



Explanation

A holistic approach to ARM looks at all the different risks that may occur.

The approach is called holistic because:

HOLISTIC APPROACH

1. focuses on the different risks that affect agriculture;

+

= Different risks

S

Example

Micro level Farmers and small businesses

2. looks at all the solutions available;

3. takes into account all the actors involved in managing.

+ Solutions available

Actors

Who are the actors involved in the holistic approach to risk?

Meso level Farmers’ organizations, NGOs, extension service, input suppliers, financial service providers

Macro level Government and international organizations

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Understanding risk in agriculture

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Understanding risk in agriculture

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EXERCISES 

Exercise 1.1 Reply to the following questions: It is the end of March. The peak in rainfall level is expected to be around mid-April and you have not yet prepared a proper drainage system for your plot. Is this a risk? Why? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

An unpredictable flood has hit your geographical area. What might the negative consequences be on your plot? And on the entire area? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

There is an outbreak of foot-and-mouth disease in the Western Districts of Sunnyland.

Is it an individual or systemic risk? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................



Exercise 1.2 Farmer Tom needs to decide how many different crops to plant. He is not sure whether he should plant only maize (which fetched a very high price last year but is prone to pest infestation) or he should intercrop maize with beans, so that if one fails he will be able to count on the other.

How would you describe these two possibilities in term of attitudes to agricultural risk? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

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CHAPTER 01

Understanding risk in agriculture

HANDBOOK

GROUP DISCUSSIONS î‚?

Group discussion 1.1 Reply to and discuss the following questions in groups: What are the agricultural risks most likely to occur in your area? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

What are the categories (farmers, crops, etc.) that have been most exposed to agricultural risks in your area in the past? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

What are the losses experienced following a particular negative event that has happened in the past in your area? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

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CHAPTER 01

Understanding risk in agriculture

HANDBOOK

GROUP DISCUSSIONS î‚?

Group discussion 1.2 Reply to and discuss the following questions in groups: Now that you know most of the possible risks for the agricultural sector, revise as necessary those risks identified in the previous Group Discussion No.1 as the most likely agricultural risks in your area. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

What are the risks that you fear the most and the least on your plot? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

What are the effects of the most feared risk, on your plot and for your family? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

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CHAPTER 01

Understanding risk in agriculture

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COUNTRY CASE STUDIES 

Country case study 1.1 Which are the most relevant country risks • Main agricultural risks in the country; • Crops that are mostly affected by such agricultural risks; • Regions that are mostly affected by such agricultural risks.

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CHAPTER 01

Understanding risk in agriculture

HANDBOOK

Chapter 02

Risk assessment at farm level

Notes:

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Platform for Agricultural Risk Management | Managing risks to improve farmers’ livelihoods

CHAPTER 01

Understanding risk in agriculture

HANDBOOK

Learning objectives SESSION 01 What are the basic elements for assessment of risks?

SESSION 02 What types of information are needed?

SESSION 03 How to measure risks and impacts?

SESSION 04 Prioritization of risks SESSION 05 Preparing one’s own risk assessment

 keywords

Frequency Notes:

Severity

Risk Assessment

Risk Prioritization

Information

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CHAPTER 02

Assessing risks at farm level

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SESSION 01

What are the basic elements for assessment of risks? 

Definition



Explanation

S

Example

To assess a risk it is important to determine its frequency and severity.

Frequency represents how many times a risk occurs within a particular time period, based on past observations.

Severity is the size of the negative consequences of the risk, quantified in terms production, income or human losses.

In the last 20 years, coffee wilt disease hit two times Emma’s land, resulting in a loss of 75% of her production each time. As a consequence Emma had less income than usual from coffee crop and a reduced ability to buy input for the next season.

I have lost 75% of my harvest and the possibility of incomes

In the last 20 years the coffe wilt desease has destroyed my crop 2 times

FREQUENCY The risk occurred once every 10 years on average.

SEVERITY The negative consequences consist in the losses of 75% of Emma production, affecting her income.

Notes:

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CHAPTER 02

Assessing risks at farm level

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SESSION 02

What types of information are needed? 

Definition



Explanation

S

To assess and manage risk farmers need to access different information from different sources.

Information needed to assess and manage risk can be on: 1. production 2. weather and climate 3. inputs 4. prices 5. pest and disease 6. credit conditions

2. Off-farm information: information provided by:

Information can be: 1. On-farm information: information collected at own farm.

• • • • • • • • • •

neighbouring farmers farmers’ organizations other actors in the value chain the extension service government newsletters newspapers radio mobile phone applications; national and international statistics laws and regulations

Example

Farmer Emma noticed a drop in yields during the current season as compared to the past. In order to understand what could have caused this, Emma started looking at different information.

10001000 900 900 800 800

PAST YEAR

PRODUCTION

INPUTS

700 700

THIS YEAR

600 600 500 500 400 400

WEATHER

z PEST&DESEASE

Notes:

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CHAPTER 02

Assessing risks at farm level

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SESSION 03

How to measure risks and impacts? 

Definition



Explanation

S

Example

The impact of risks is measured in physical quantity and/or money losses.

The impact of risk at farm level can be measured quantifying different types of losses, such as:

• lower yields • income losses • livestock losses • human life losses • saving and investment losses • increased farming costs • other asset losses (equipment, house, etc)

Emma is wondering about possible risks affecting her farming activities and related consequences.

What she can do:

Will there be a drought this year?

What I will lose?

Ask extension workers to advise how to protect your harvest.

Listen to the radio and read the newspaper.

Ask the farmers’ organization to help you identify whether you are going to be affected.

POSSIBLE IMPACTS

lower yields income and asset losses livestock losses loss of human life

Notes:

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Assessing risks at farm level

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SESSION 04

Prioritization of the risks 

Definition



Explanation

Deciding which risks to prioritize helps to better manage and protect farming activities from major damage caused by hazards.

A tool called RISK MATRIX can help prioritize different risks faced by farmers and help them decide which measures to put in place first to manage them.

The prioritization of the risks is done by considering the frequency and severity of each risk. (See What are the basic elements for assessment of risks).

Session 2.01.

The red cells identify high-level risks and the yellow cells are the medium-level risks, while the green cells contain low-level risks.

VERY HIGH VERY HIGH < THAN EVERY 2 YEARS

HIGH

MEDIUM

LOW

VERY LOW

PESTS AND DISEASES

frequency

HIGH BETWEEN EVERY 2 AND 5 YEARS MEDIUM BETWEEN EVERY 5 AND 10 YEARS LOW BETWEEN EVERY 10 AND 20 YEARS VERY LOW > THAN EVERY 20 YEARS

severity

`

Tool How to use the risk prioritization matrix You are now able to prioritize and decide which measures to put in place to manage your risks, starting from the high-level risks (red cells) and moving to the lowlevel risks (green cells).

1

List all of the risks that can potentially harm farming activities.

2

Rank each risk by frequency from very low to very high.

3

Rank each risk by severity from very low to very high.

4

Place the risks within the matrix, based on the combination of their severity and frequency.

Notes:

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SESSION 05

Prepare your own risk assessment 

Definition

Farmers are encouraged to prepare their own risk assessment or to ask for help to assess their risks, for example from the extension worker.



Explanation

These easy steps can help initiate the risk assessment process: 1. Draw up a list of agricultural products (crops, livestock, etc.) and farming activities carried out at farm level.

2. Assign risks for each crop, livestock, etc. and the related farming activities, or identify common risks (for example, security issues).

3. Assess the frequency and severity of the risks (it can be enough to distinguish between different levels of impact, for example from very low to very high).

4. Prioritize risks based on the assessment.

5. Identify the root causes for the priority risks identified.

After going through these five steps, tools and strategies can be identified and implemented.

S

Example

Emma has compiled the risk assessment for maize farming activity.

SEVERITY

FREQUENCY

low-quality not genuine

MEDIUM

LOW

bad weather

HIGH

LOW

pest and disease

MEDIUM

MEDIUM

STORAGE *

grain borer mice

MEDIUM

HIGH

SELLING

low prices compared to production costs

MEDIUM

MEDIUM

BUY INPUTS

GROWING

* Storage is the risk to prioritize because it has a combination of frequency and severity higher than other risks.

Notes:

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Platform for Agricultural Risk Management | Managing risks to improve farmers’ livelihoods

CHAPTER 01

Understanding risk in agriculture

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EXERCISES î Ś

Exercise 2.1 Farmer Tom grows maize on half a hectare of land. In a good year he can harvest 1,000 kilos of maize. However, low-quality pesticides led the maize to be attacked by minor pests. During the last 10 years (2005 to 2014) he has been attacked ten times and has lost about 10 per cent of his harvest each attack.

On the other hand, farmer Emma uses good-quality pesticides on her half hectare of land, but in 2014 the whole area suffered a severe drought. The first drought had occurred in 2005, followed by one in 2009 and the current one in 2014. Droughts meant not enough water for the maize to grow at the expected harvest level (1,000 kg) and Emma lost 40 per cent of the crop each time it occurred.

1. Explain how to calculate frequency of the risks that Tom and Emma are facing?

2. What are in total the crop losses for farmer Tom and farmer Emma?

3. What risks would you consider the most difficult to handle? (to discuss with the participants) .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

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CHAPTER 02

Assessing risks at farm level

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EXERCISES 

Exercise 2.2 Using the tool entitled How to use the risk prioritization matrix, look at the following table reporting the frequency and severity of agricultural risks in Sunnyland (in the local currency, LC) and fill out the risk prioritization matrix. For the frequency, estimate how many times each risk is likely to occur in one year.

Frequency and severity of agricultural risks in Sunnyland RISK

FREQUENCY

SEVERITY

PESTS AND DISEASES

Annual

100,000

INPUTS

Every 2 years

10,000

DROUGHT

Every 10 years

350,000

PRICES

Every 3 years

75,000

POST-HARVEST RISKS

Every 3 months

15,000

Risk prioritization matrix for Sunnyland VERRY HIGH

HIGH

MEDIUM

LOW

VERY LOW

VERY HIGH

Frequency

HIGH

MEDIUM

LOW

VERY LOW

Severity

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GROUP DISCUSSIONS î&#x201A;?

Group discussion 2.1 Reply to and discuss the following questions in groups: What are the most and the least severe risks in your area? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

What are the most and the least frequent risks in your area? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

What could your potential responses or reactions be to a very severe risk, if not managed in advance? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

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GROUP DISCUSSIONS î&#x201A;?

Group discussion 2.2 Reply to and discuss the following questions in groups: What type of information do you receive? How often? From whom? Through what medium? Do you pay for it? How do you use this information? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

What information would you like to receive? Are you willing to pay for it? How much?

How could this information change your farming practices? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

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GROUP WORK 

Group work 2.3 Do the following in groups: • Develop an overview/map of the agricultural commodities produced in a selected geographical area; • Choose one or two agricultural commodities; • Assign risks to their corresponding farming activities; • Assess the frequency and severity of each risk (quantification might not be possible; a simple ranking into high, medium and low severity and frequency might be enough); • Prioritize the risks, based on the assessment; • Identify two top-priority risks; • Identify the root causes of these two top-priority risks.

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COUNTRY CASE STUDIES î&#x20AC;?

Country case study 2.1 Compile the main sources of information to support your agricultural risk assessment.

Where can you get information for the following categories?

Production Sources: ......................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

Weather and Climate Sources: ......................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

Inputs Sources: ......................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

Prices Sources: ......................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

Pests and Disease Sources: ......................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

Credit Sources: ......................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

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Chapter 03

Identification of risk management tools

Learning objectives SESSION 01 How to deal with risks SESSION 02 Risk mitigation SESSION 03 Risk transfer SESSION 04 Risk coping

î keywords

Risk mitigation Risk transfer ARM tools

Risk coping Layers of responsibility

Identifying risk management tools

CHAPTER 03

HANDBOOK

SESSION 01 Togliere and tools.

Dopo il punto metti questa frase: “The measures are then associated with different tools.”

How to deal with risks 

Definition



Explanation

Farmers can reduce the negative impacts of risks at farm level through different measures: Risk mitigation, Risk transfer and Risk coping. The measures are then associated with different tools.

The measures to address risks can be divided into different type of tools: 1. Risk mitigation measures include preventive actions or TOOLS to reduce exposure to, severity of, or probability of loss. These “actions” can be grouped in: on-farm tools / off-farm tools / other farmlevel risk-reducing choices

S

2. Risk transfer measures transfer the uncertainty of risk impacts to other actors different from the farmer.

These “actions” can be grouped in: market-based tools / finance-based tools

3. Risk coping measures consist in accepting the negative consequence of the risks.

These tools include: savings / government transfers.

To be implemented, all tools have to be available and adaptable to the local context.

Example

The measures are associates to risks that have different frequency and severity.

Farmers Households Community

Markets

Governments

RISK MITIGATION

RISK TRANSFER

RISK COPING

+

+

HIGH FREQUENCY

LOW FREQUENCY

VERY LOW FREQUENCY

LOW LOSSES

MEDIUM LOSSES

VERY HIGH LOSSES

Frequency Losses

Notes:

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Identifying risk management tools

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SESSION 02

Risk Mitigation 

Definition

On-farm and off-farm tools can be implemented by the farmer alone, or by the community intervention (farmers’ organizations and extension workers) and government.

02.1. On-farm management tools

 

Definition

Farmers can count on own farm activities to limit the negative effects of a shock.

Explanation

There are three main types of on-farm tools: 1. Climate-smart agriculture: farming practices in response to the negative effects of climate and weather on production, incomes and well-being.

S

2. Production diversification: farmers can diversify their farming activities.

3. Other farm-level riskreducing choices: farmers may also use other conventional farm-level measures.

Example

Sarah can choose among different on-farm management tools.

Climate-smart agriculture • conservation agriculture • soil and water conservation • improved livestock management practices

Production diversification • choose to plant multiple crops, adopt crop rotation over multiple seasons, or intercrop in the same season.

• engage in different farm businesses, such as livestock, aquaculture and apiculture.

Other farm-level risk-reducing choices • • • • • •

drought-resistant seeds good-quality chemicals irrigation techniques improved storage facilities Technology adoption Improved pest and disease management • Warehouse receipts system

Notes:

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CHAPTER 03

Identifying risk management tools

HANDBOOK

SESSION 02

Risk Mitigation 

Definition

ON-FARM and OFF-FARM tools can be implemented by the farmer alone, or by the community intervention (farmers’ organizations and extension workers) and government.

02.2. Off-farm management tools



Definition



Explanation

Farmers can use tools outside farm activities.

There are two main types of off-farm diversification tools: 1. Asset diversification Have access to secure and affordable credit; be able to borrow, save and invest.

S

2. Income diversification Generate different incomes through activities outside the farm (non-farm jobs).

Example

Sarah can sustain farming activities in a certain period using off-farm management tools.

Asset diversification such as saving money, buying machinery

Income diversification such as handcrafting or working in a small stand

Notes:

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Identifying risk management tools

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SESSION 03

Risk Transfer 

Definition

Market and finance-related tools help farmers to transfer the uncertainty of the risk impact to other actors.

03.1. Market-related tools

 

Definition

Farmers can use market tools to transfer risks.

Explanation

Market transfer tools can help farmers to earn profits from their farming activities by transferring the risks to another party. Such tools are: 1. Contract farming.

Contractual arrangements between small-scale producers and commercial stakeholders or companies to reduce or eliminate price and market risks for farmers (by guaranteeing them a fixed price and/or a certain amount of supply in advance).

S

2. Commodity exchanges is a “platform” where different groups of

3. Futures markets.

participants - buyers and sellers - trade agricultural commodities based on rules and procedures previously defined by the exchange.

Agreements for a specific future time, with transfer of the risks to another business that is paid to assume them.

Example

All of the marketing tools involving contracting between farmers and other actors require certain preconditions.

Preconditions Trust between farmers and other contracting stakeholders A clear understanding of the contract conditions Balanced negotiating power between the two contracting parties Balanced access to information between the two parties Notes:

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CHAPTER 03

Identifying risk management tools

HANDBOOK

SESSION 03

Risk Transfer 

Definition

Market and finance-related tools to help farmers to transfer the uncertainty of the risk impact to other actors.

03.2. Finance-based tools



Definition



Explanation

Farmers may also have the opportunity to access modern financing tools.

In addition to the traditional agricultural credit and insurance institutions, farmers can use innovative risk financing tools, such as: 1. Agricultural insurance is a contract where 2. Weather index-based insurance is a type of a party (the insurer) protects the insured (a insurance that rewards for damages or losses farmer) against an amount of loss if the event(s) based on an index that includes weather factors. take place within a specified time period.

The farmer pays a fee, called a premium. The amount of the fee will depend on the frequency and severity of the risk.

S

Example

How it works the insurance for Sarah.

Weather index based insurance

Damages caused by bad weather

Reward for damages

Notes:

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Identifying risk management tools

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SESSION 04

Risk Coping  

Definition

For certain type of risks, farmers need to find ways to accept (cope with) the negative consequences of a risk occurrence.

Explanation

Despite risk reduction and transfer tools, farmers can still be negatively affected by risks.

Therefore coping with risk involves using measures and tools after the occurrence of the negative event (ex-post), such as: 1. Savings or selling assets, i.e. building up savings or selling assets to prepare for hard times.

S

2. Government transfer tools, include public food grain reserves, disaster assistance programmes, social protection and safety nets.

Example

Risk Mitigation tools • Climate-smart agriculture • Crop diversification • Improved inputs • Work-off farm • Warehousing storage • Finance and microfinance

• Rotating credits in community • Government cash transfer Risk copying tools

Market-related risk transfer tools • Contract farming

• Insurance Finance-related risk transfer tools

Notes:

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CHAPTER 04

Identifying risk management tools

HANDBOOK

EXERCISES 

Exercise 3.1 Farmer Sarah’s family owns three hectares of land. All family members work on the land (Sarah, her husband Richard and their sons – 18 and 15 years old). In good years, they harvest a sufficient quantity of maize for consumption and for sale in the market, and have enough money to live on the proceeds of this monoculture crop.

However, in the last five years they have noticed that yields are declining, probably due to reduced rain.

How can farmer Sarah’s family respond under three different scenarios: 1. they have little money to invest on the farm; 2. they have enough money to invest on farm activities; 3. you know that one of his sons has a vocational diploma and they live within commuting distance from a medium-sized village.

Draw your ideas on the solution(s) for the three conditions given above.

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EXERCISES î&#x201A;?

Exercise 3.2 Farmer Sarah cultivates a half hectare of rice (with yields of 4 tons per hectare). He sells half of his harvest during the peak season. The rest is stored in his house, with average losses of 20 per cent per season. He can sell rice at 10 LC per kg during the peak season, and 20 LC per kg during the low season.

A neighbouring farmer told Sarah that a licensed storage facility had just opened nearby. The licensed storage facility guarantees there will be no losses on rice, due to improved temperature and storage conditions. Tom would pay 1,000 LU per year as a fee for 0.5 tons of rice.

Would you recommend that Sarah use the storage facility? Does your answer change if the fee increased to 2,500 LC a year for 0.5 tons? Elaborate on your answer in consideration of the fact that Sarah would also like to buy a tractor and needs a loan from the local bank.

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CHAPTER 01

Identifying risk management tools

HANDBOOK

GROUP DISCUSSIONS 

Group discussion 3.1 Reply to and discuss the following questions in groups: • Your area is prone to biological risks affecting the main staple crops. What are the measures and tools you would put in place as a farmer? As an officer of the Ministry of Agriculture?

• If you were an insurer, how would you explain and sell insurance against agricultural risks to a farmer? To the government?

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Identifying risk management tools

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GROUP DISCUSSIONS 

Group discussion 3.2 Reply to and discuss the following questions in groups: • What tools are those most used in your area? How would you judge their effectiveness?

• Which tools do you think would be useful in your area, but are currently unavailable? Why would you choose these tools?

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Chapter 04

ARM strategy and monitoring

Learning objectives SESSION 01 ARM strategy SESSION 02 Tools for monitoring activities

î keywords

ARM Strategy Cash flow

Tool monitoring

Risk reporting

CHAPTER 04

ARM strategy and monitoring

HANDBOOK

SESSION 01

What is an ARM strategy? 

S

Definition

An ARM strategy is a combination of tools to respond to the negative impacts of risks.



Explanation

After assessing and prioritizing risks, farmers need to choose a strategy to manage risks, i.e. one tool or a combination of tools that are available at farm level, taking into account: 1. advantages and disadvantages of each tool; 2. a comparison between how much they costs and which benefit they bring at farm level.

Example

John is uncertain about which tools to use to protect his farming activity from risks.

Risks

Tools

?

Characteristics

Disadvantages

Measures

Advantages

ARM strategy Notes:

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ARM strategy and monitoring

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SESSION 02

Why do we need tool monitoring activities? 

definition

Monitoring tools consists in checking how the tools are performing at farm level



Explanation

Monitoring tools consists in evaluating if the tool have mitigated the negative impact of risks as expected.

The performance can be evaluated: • good if the tools are effective in limiting the negative consequences of risks,

It is important that the tools work well in protecting the farming activities from risks.

• bad if the tool is not responding as desired.

If the tools and the strategy are performing bad, they need to be revised.

It is very important to report periodically the performance of tools and strategy to compare their performance in time.

S

Example

John has learned how to monitor what is happening on his land to protect his crop from risks.

1

2

3

4

ANALIZE

CHECK

REPORT

BUY TOOLS

Notes:

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CHAPTER 04

ARM strategy and monitoring

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EXERCISES 

Exercise 4.1 Farmer John’s family owns three hectares of land. Two hectares are planted in maize (1.5 tons/hectare) and one hectare in beans (0.75 tons/hectare). The prices of maize and beans are 20 LC/kg and 50 LC/kg respectively. The costs of farming include the costs of seeds (5000 LC), fertilizers (15,000 LC) and occasional labour (200 LC per day for 50 days each year). One son works at a local shop, earning 50,000 LC/year.

Average household consumption expenditures are 70,500 LC per year.

1. Complete the following cash flow scheme (first column) Item

Quantity/price/ monetary value

With risk 1

With risk 2

Combination of risks

Farm revenues (A = B + D + E …)

Yield (kg) (q) Losses (kg) (l) Unit price in LC (p) Revenues from commodity 1 (B = (q - l) x p) Yield (kg) (q) Losses (kg) (l) Unit price in LC (p) Revenues from commodity 2 (D) Revenues from commodity 3 (E) …

Physical inputs in LC (i) Labour in LC (m) Farm costs (C = I + m) …

Off-farm income (Y) Household costs (W) …

Net household income (A – C + Y - W)

(...)

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ARM strategy and monitoring

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(...)

In particular, farmer John’s family has received information from the local weather station of a possible drought (risk 1) in the next crop season. The frequency of droughts is estimated at one every five years. Risk 1 could lower the crop yield by 50 per cent. In addition, the newspaper has reported an outbreak of army worm (risk 2) in the neighbouring countries, which has a 50 per cent chance of reaching his farm. The army worm could damage 15 per cent of the maize crop yield.

2. Calculate the expected net household income.

To face the two risks identified, farmer John’s family can use three different tools: a. A drip irrigation system (100,000 LC) that will help not only to save yields in the event of weather risks, but will also increase the yields of both commodities by 10 per cent (for risk 1); b. Insurance (35,000 LC per year), which will cover losses in yields due to low rains (for risk 1); c. Pesticides (7,500 LC) (for risk 2).

3. Taking into account the expected household net income, the costs of the tools and the benefit in implementing a strategy, choose the best option for farmer John’s family.

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CHAPTER 04

ARM strategy and monitoring

HANDBOOK

EXERCISES î Ś

Exercise 4.2 Reply to the following questions.

Farmer John faces a severe risk of having his crop affected by a pest, so he decides to spray pesticide one more time. After that, he stops attending to the crop; only at harvest does he realize that about 30 per cent of the harvest has been lost.

1. What went wrong? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................

2. What could he have done to prevent this outcome?

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GROUP DISCUSSIONS 

Group discussion 4.1 Reply to and discuss the following questions in groups: • Do you have a strategy for managing risks at farm level? How would you assess your strategy?

• Do you use cash flow analysis?

• What would you need in order to improve your agricultural risk management strategy? .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................. ..................................................................................................................................................................................................................................................



Group discussion 4.2 Reply to and discuss the following questions in groups: • Do you perform any monitoring activities at farm level? What about monitoring tools to manage risks? If so, do you find them useful?

• What do you think is the easiest part in the tool monitoring? And the most difficult one?

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CHAPTER 04



ARM strategy and Understanding risk monitoring in agriculture

HANDBOOK

GLOSSARY Agricultural Risk Management (ARM)

Constraint

Cycle

Frequency

Holistic

Losses

Probability

Risk

Severity

Systemic risk

the process that attains dealing with risks. It requires anticipating potential problems and planning solutions in advance to limit their negative consequences at farm level

longer-term changes on “chronic” patterns (reversible or irreversible)

an holistic approach to agricultural risks implies that no risk is considered in isolation

the likelihood that a natural or man-made event/hazard will manifest itself in a geographical place and within a particular time-period

the size of losses associated with the occurrence of event or hazard

conditions or impediments that lead to suboptimal performance

how often an event or a hazard occurs in a certain time frame

The expected losses from a hazard can be categorized in physical damages, economic losses, livestock losses, and deaths

an uncertain event, result of natural hazards or man-made activities that leads to physical damages or to monetary losses

it is a risk associated with an entire market or geographical area

Trend

repeated set of events or actions that happen again and again in the same order

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Contacts PARM Secretariat

International Fund for Agricultural Development (IFAD) Via Paolo di Dono 44 - 00142 Rome (Italy)

parm@ifad.org www.p4arm.org @parminfo