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Take note of these farming business risks

February 2020

Marius Greyling, Pula Imvula contributor. Send an email to mariusg@mcgacc.co.za  

What is a risk? A risk is the possibility that an unforeseen, unplanned, un-natural, out of the ordinary, un-expected event may occur and could cause losses of some nature.

When you commence with the production of an agricultural product you face possible risks. Risks that are for ever changing – an ongoing challenge to manage.

The aim of this article is to create a greater awareness of the risks facing our farmers. A greater awareness will assist in managing these risks.

These result from changes in policies and regulations that affect agriculture and is a major concern. In South Africa our farmers are experiencing a more unfriendly regulatory framework with very little support for farmers, even during different disasters they face.

Another institutional risk faced by farmers is a political risk which is related to the external environment of a farming business. These risks are beyond the farmer’s control but need to be taken in consideration in the business strategy. This could include issues such as land reform, agricultural strategy of government and labour legislation.

Production process
During the production process numerous events can occur such as uncertain climatic conditions (droughts, flooding, hail, severe frost) and the occurrence of disasters such as veld fires and the outbreak of plant and livestock diseases. Because of the physical damage and production losses, events such as mentioned, have a serious influence on the financial success of the farm business. 

In terms of the production process the risks related to our climate are changing dramatically because of climate change. What is changing? All forecasts indicate that South Africa will become hotter, the average temperature is on the increase. Heat waves will be occurring more frequently, this, will result in more veld fires occurring more frequently. Our country will become even drier and we will experience more severe droughts, storms, hail, flooding and so forth. The interesting thing is that we have always experienced this in South Africa – the change will be experienced in that these events will occur more frequently and will be more severe of nature.

The managing of water resources will become more challenging and we will have to improve and conserve our soils (land) to allow for improved water infiltration. Load shedding has become a major risk regarding production, especially where electricity is used during the production process. The occurrence of the outbreaks of diseases and/or pest on a more regular basis poses a greater risk towards achieving production goals.

The continuous deterioration of infrastructure in our country such as the roads, railways, water infrastructure and electricity infrastructure increase the risk of production.

Consumers are demanding more and more healthy food produced in an environmentally friendly manner and this forces farmers to apply eco-friendly production systems and to be transparent about this. Traceability is demanded – where does the product come from, is it produced in an acceptable way?

Marketing process
During the marketing process events may occur that could disrupt the marketing process and/or affect prices adversely. The loss can be physical – you cannot market your product (bridges are damaged during a flood). Or the price of your product may drop due to changes to the policy environment (import tariffs for instance) and remember farmers are price takers.

Deterioration of roads and railways also poses a greater risk to our farmers regarding the marketing of their products – to for instance get their products to the markets on time.

Because markets are generally complex and involve both local and international considerations, farm businesses’ return may be dramatically affected by events in other regions of the world. 

These could be lower income and/or prices affecting the positive cash-flow position, thus affecting the financial success of the business. It should be noted that production, marketing and financial risks are closely interrelated.

The last category of risk to be considered is related to the labour force of a farming business. The change in managing this risk is the enforcement of rigid and strict labour legislation, such as for instance the application of a minimum wage. And, it is rather difficult to terminate a service contract. You may also experience unpredicted negative conduct by your staff. Thoughtless behaviour by either the farmer or his staff could lead to unnecessary disruptive action, resulting in an interruption of the production and/or marketing of products.

Farming businesses in South Africa are increasingly exposed to different risks with drastic consequences should it not be taken in consideration during the management of the business. Farming in South Africa has never been easy. It requires tenacity and nerves of steel. Indications are that it will with all probability become even more difficult. As a farmer you have two choices: Plan in advance and make provision or, quit farming.  

Publication: February 2020

Section: Pula/Imvula