Report: Financial Risk Analysis and Risk Management in Agribusiness Workshop, November 24-28, 2014, Fiji

Fiji National University, the National Productivity Organization (NPO) of Fiji

Fiji National University, the National Productivity Organization (NPO) of Fiji

The workshop was conducted on the premise that agribusiness plays a vital role in stimulating the economy in rural areas.  It provides employment and indispensable links for small farmers to inputs and markets.

The operation of agribusiness enterprises is vulnerable to risk: unpredictable weather, pest infestation, economic and political situations, and commodity market prices, which often lead to loan delinquencies and defaults in repayment.  If these risks are not managed, there could be adverse effects on the sustainability of the enterprise, income, and employment.

The workshop aimed to:

1) review recent developments and assess the emerging trends and issues in the financial management of agribusiness;
2) identify appropriate tools, techniques, and best practices in financial risk analysis and management; and
3) enhance the participants’ knowledge and understanding of financial risk analysis and risk management in agribusiness.

OBJECTIVES FOR PARTICIPATION

A. Retamar, PCIC

The Philippine Crop Insurance Corporation (PCIC) is the sole agricultural insurance provider of the Philippines.  It is mandated by law to provide insurance protection to the agricultural producers against loss of their crops and non-crop agricultural assets on accounts of natural calamities, plant pests and diseases, and/or other perils.

As Officer-in-Charge of the planning office of the Corporation, the Project was a venue for me to gain more knowledge on financial risk analysis and risk management in agribusiness that will be useful in the conduct of studies and researches for the Corporation’s future directions and thrusts; while  the new developments, emerging trends, issues, tools, techniques, and best practices I learned will be helpful in evaluating the current Corporation’s programs that will lead to innovation and improvement of PCIC’s agricultural insurance programs.

Improved agricultural insurance programs means better insurance protection for farmers’ and fisherfolk’s farm investments, more responsive risk transfer mechanisms, and increase in agricultural production through more loans extension of lending institutions.

PROFILE OF PARTICIPANTS

The workshop has twenty-four (24) participants from different countries, and there are three (3) Filipino participants in the workshop.  Most of the participants are from financial institutions and agribusiness.  The other two (2) Filipino participants are

Mr. Arnold B. Arbuntante
Micro-Agri Program Officer
People’s Bank of Caraga Inc.,

Mr. Jose Pepito A. Yusingbo
Bank Executive Officer III/Manager
Development Bank of the Philippines.

I belong to the institution providing agricultural insurance while my two co-participants belong to financial institutions providing agricultural loans to farmers and fisherfolk.

SCOPE, CONTENT, METHODOLOGY

The five-day workshop was an opportunity to enhance knowledge and understanding of the different aspects of financial risk analysis and risk management in agribusiness.  At the same time, an opportunity to gain knowledge on other countries’ financial risk analysis and risk management practices in agribusiness.

It was designed to build the competencies of the agribusiness project investment planners, project managers, financial analysts, and credit and loan evaluators that serve the credit and financial requirements of agribusiness companies, entrepreneurs, and small farmers.

The workshop consisted of paper presentations of case studies of the resource persons and country papers of the participants, group discussions, and field visit.  On the whole, the topics covered were:

a. Financial service delivery for agribusiness in Asia: Tends and challenges;
b. Type of financial risk in agribusiness:  Essential features and key factors;
c. Concepts, principles, and approaches to financial risk management in agribusiness;
d. Role of insurance and credit guarantee schemes instruments for mitigating risks for agribusiness;
e. Market-based price risk management instruments for mitigating risks of agribusiness;
f. Successful model of a financial risk management scheme of financial institution in the region; and
g. Capacity development needs of agribusiness and rural financial institutions in risk management.

There were three (3) resource speakers of the workshop:

1) Ms. Marilyn Manila
Community Development Director
Center for Agriculture and Rural Development Mutually Reinforcing Institutions (CARD MRI)
Philippines

2) Mr. Tajur Islam
Senior Vice President and Chief Rating Officer
Credit Rating Agency of Bangladesh

3) Mr. Surya Swaroop Saxena
Chief Manager of Agriculture Insurance Company of India Ltd.

Ms. Manila presentations were on experience of CARD MRI as a financial institution involved in lending for agriculture and rural enterprise, Mr. Islam talked about the concepts on financial risk analysis and risk management, and Mr. Saxena discussed protecting the farmers and financial institutions through agricultural insurance and credit guarantee.

To observe actual agribusiness issues and risk mitigation practices, the group visited the TOA (Fiji) Limited. The enterprise is new in agribusiness, involved in poultry farming and located in rural area of Nalovo, Nadi.  The challenges faced by TOA are difficulty in arranging sufficient land in preferred locality, limited number of sources of financial fund, and limited power of bargaining in marketing.

The participants were divided into three groups upon return to the workshop venue and were asked to prepare presentation on how to mitigate the challenges observed.

Because of limited time on country paper presentations, each country was required to combine all their country papers into one presentation per country.  We presented the overview of the Philippine agribusiness sector, such as the major institutional players and their programs and services, major financial issues and challenges faced by agribusiness, risk management initiatives, and the government agricultural insurance programs to mitigate the risks in agribusiness.

In the presentation of the different countries, the following are the common facts, issues and mitigations among the countries in the Asia Region:

FACTS

• Agriculture is the major livelihood of the greater proportion of the population
• The agriculture sector is usually comprised of the poorest section of the society
• Agriculture is vital as it provides both employment and food security
• The rural population has limited financial resources and ability
• Agriculture is sensitive to uncontrollable risk such as adverse weather
• Natural disasters and losses in enterprises greatly affect the life of the people involved in agribusiness because of the limitation in financial resources and ability

ISSUES

• Lack of proper infrastructure in place particularly in rural areas including illiteracy of farmers and small size of holdings which both undermines better utilization of modern technology
• Potentially lower profitable projects in agriculture than other sectors due to small scale of operation and high level of operational risk
• Insufficient protective policies for stronger contribution of private sector
• Lack of policies in place and appropriate strategic plan to promote investment by private sector
• Undeveloped financial institutions and markets

MITIGATIONS

• Government Policies
• Use of credit as a major instrument for agricultural development
• Establishment of institutional structures to serve as channels of credit to the agricultural sector
• Purchase of farmers’ products at support prices (guaranteed price)
• Subsidized agricultural inputs
• Use of agricultural crops insurance and guarantee scheme to mitigate risks

OUTCOMES AND EVALUATION

A. Retamar, PCIC

In general, the workshop met its objective of providing venue for sharing information, best practices, issues and challenges in agribusiness of different countries.  The resource speakers were able to impart their theoretical and actual knowledge on financial risk analysis and risk management in agribusiness.

The following are the knowledge I learned from the workshop:

• To balance the portfolio of the vulnerable agribusiness loans, financial institutions shall diversify their portfolio by considering the less risky loans in the value chain;
• Financial institutions shall shift from collateral lending to cash flow to accommodate more small farmers and entrepreneurs agribusiness loans;
• Financial institutions shall consider agricultural lending as a portfolio and not by individual;
• Agricultural insurance plays a vital role in risk mitigation of financial institutions, farmers and entrepreneurs; and
• I appreciated giving extra service to clients or considering the activities in the horizontal value chain, as it helps in decreasing the exposure from risk of both the institution and its clients.

RECOMMENDATIONS AND ACTION STEPS

A. Retamar, PCIC

As a support to the government objective of attaining inclusive growth, agribusiness should be sustained as it is the major livelihood of the greater proportion of the population, and so as for the poorest section of the society be able to participate in the economic activities of the country.

The players in the agribusiness: financial institutions, farmers/fisherfolk, entrepreneurs, and the government, are connected with each other.  It is important that they work together to boost the flow of credit in agribusiness.  The following are the general recommendations in the workshop:

• Establishment of credit rating agency,
• Development of internal rating system,
• Shifting from collateral concept to cash-flow concept,
• Introduction of agricultural insurance,
• Attract farmers to insurance by providing loyalty incentives in premium as discount or flexibility in payments,
• Warehouse financing to enable farmers access finance on post-harvest basis,
• Value chain financing – ensuring backward and forward linkages,
• Appropriately structured loans for meeting the varying demands of the sector, and
• Portfolio diversification.

On the side of agricultural insurance program as a risk mitigating tool, I can say that the agriculture insurance program of our country is more responsive on the requirements of our agricultural sector than the other countries.  Philippines has more complete agricultural insurance lines than other countries, while other countries’ government have not yet even put-up their own agricultural insurance program.

I appreciated and will support the extra service that PCIC is providing to the community of its clients, such as conducting information campaign and setting-up traps to control pests and diseases, as this not only helps the farmers on controlling their losses, but also benefits the Corporation.

Having deeper understanding between the link of agricultural insurance and the financial institutions, and the importance of agricultural insurance to promote the flow of credit to agribusiness, I will actively participate in information dissemination of PCIC’s agricultural insurance programs.  On this way, more financial institutions will support farmers, fisherfolk to engage in agribusiness.

SUBMITTED BY

ALLAN E. RETAMAR
Office-in-Charge
Planning and Management Information Office
Philippine Crop Insurance Corporation

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