NOTICE: Hard copies of the Australian New Crops Newsletter are available from the publisher, Dr Rob Fletcher. Details of availability are included in the
Advice on Publications Available.[Most of these remarks have been extracted from a Plenary Address given by Barry D Buffier, National Manager, Agribusiness, Westpac Banking Corporation at the Emerging Opportunities in Agriculture Information Day at Tamworth, October 9, 1998.
Further information has been included from the publication 'Rural Risk Management: Farming for the Future Seminar Workbook' prepared by Mike A Krause. Mike was then with Agricultural Risk Management Pty Ltd.
Mike Krause is currently with:
Applied Economic Solutions Pty Ltd
10 Warramunda Crescent
Banksia Park, South Australia 5091
Telephone: 08 8396 7122
Facsimile: 08 8396 7133
Email: mkrause@iaccess.com.au
The Workbook is published by the Westpac Banking Corporation (1996)]
Risk is defined as exposure to the chance of injury or loss.
Business challenges vary in their chances of producing a financial loss or gain.
New crop industries are usually considered higher risk enterprises than conventional crop farming because the future trading (market), financial (economic), physical (production) and social (personal and management) environments are more likely to be unknown and thus it is more difficult to generate the profit outcomes sought.
¯
Almost certain |
HIGH |
||||
Likely |
MEDIUM |
RISK |
|||
50:50 |
|||||
Unlikely |
LOW |
RISK |
|||
Very rare |
RISK |
||||
Insignificant |
Minor |
Moderate |
Major |
Catastrophic |
Impact of the Event
Risk management is the process of identifying, understanding, controlling and pricing the risks that are inherent in emerging crop opportunities in agriculture.
There is a risk involved with the adoption of any new variety of any conventional agricultural or horticultural crop.
This is because the levels of information and experience available are less than would be available with the previously well-used variety.
Similarly, risks are likely to increase step-wise with:
These increased risks arise because entirely new value-chains from producer to consumer have to be developed. Both production and product are untried and unknown with most new crop industries.
The likely level of risk can be predicted from the joint consideration of the likelihood of an event occurring and the impact the event is likely to have on the fortunes of the new crop industry concerned, as shown in the following diagram (Buffier, 1998):
Risk management is about understanding where a business fits on this matrix, ensuring that there is an acceptable risk:reward ratio or undertaking strategies that will move the business to a position where the risk is lower, relative to the reward.
The health of an agricultural enterprise can be gauged from the level of equity and the nature of the cash flow, as shown in the following diagram (Buffier, 1998):
For broadacre conventional rural properties, a low equity level would be less than 50%, medium would be 50-70% and a high level would be over 70%.
The following could be used as risk management strategies:
When a lending agency considers whether to use debt or equity financing, it is likely to consider the following:
Evaluating new crop business opportunities
Any claims made by authors in the Australian New Crops Newsletter are presented by the Editors in good faith. Readers would be wise to critically examine the circumstances associated with any claims to determine the applicability of such claims to their specific set of circumstances. This material can be reproduced, with the provision that the source and the author (or editors, if applicable) are acknowledged and the use is for information or educational purposes. Contact with the original author is probably wise since the material may require updating or amendment if used in other publications. Material sourced from the Australian New Crops Newsletter cannot be used out of context or for commercial purposes not related to its original purpose in the newsletter
Contact: Dr Rob Fletcher, School of Land and Food, The University of Queensland Gatton College, 4345; Telephone: 07 5460 1311 or 07 5460 1301; Facsimile: 07 5460 1112; International facsimile: 61 7 5460 1112; Email:
r.fletcher@mailbox.uq.edu.au[
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GK; latest update 6 June 1999 by: RF