FANUEL KASAMBA
R2305D16624906
Markets and Financial Institutions
UU-MBA-751-MW
14/7/2024
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Table of Contents
1.0 Business Overview ................................................................................................................. 3
2.0 Introduction to Risks and Financial Risk Management ............................................................ 3
3.0 Key Financial Risks for Agribusiness ......................................................................................... 4
4.0 Hedging Strategy for Agribusiness Risk Management .............................................................. 5
5.0 Conclusions and Recommendations............................................................................................ 7
5.1 Summary of Findings................................................................................................................. 7
5.2 Recommendations...................................................................................................................... 7
6.0 References .................................................................................................................................... 8
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1.0 Business Overview
Founded in 2023, Old-MacDonald's Agro Company (OMD) is a prominent agricultural
company that specializes in crop production and livestock husbandry. The company works in
several parts of Malawi, so it can guarantee a wide variety of agricultural products that are
suitable for both local and foreign markets. The goal of Old-MacDonald's Agro Company is
to promote sustainable farming methods by combining cutting-edge agricultural technology
with conventional farming knowledge to increase output and efficiency.
The enterprise grows a wide range of crops, such as vegetables (potatoes, tomatoes, and
carrots), fruits (bananas, oranges, and apples), and grains (rice, wheat, and maize).
To improve crop yields and preserve soil health, the company uses organic farming methods,
precision farming techniques, and cutting-edge irrigation systems.
The rearing of cattle for beef and dairy products, poultry for chickens for meat and eggs, and
sheep for wool and meat production are the main objectives of the livestock division. OMD
takes great care to maintain the health and caliber of its animals by enforcing strict guidelines
for animal welfare and biosecurity.
2.0 Introduction to Risks and Financial Risk Management
Every business setup entails some level of risk. Risk is the uncertainty that a loss will occur,
it is the probability and its consequence function that a loss or unfavorable occurrence will
occur (Rehman, 2016). In agricultural business, financial risk management entails a
methodical process that comprises, Identification of risks which is the process of identifying
and recording any threats to the organization. Assessing risks by determining their impact and
likelihood. Prioritizing risks that involve arranging them according to likelihood and possible
impact. Creating plans to lessen or completely remove the effects of risks is known as risk
mitigation. Risk Monitoring and Reporting, this involves keeping a close eye on potential
threats and reporting on how well risk management techniques are working.
Agribusinesses are subject to a number of major financial risks that could have an impact on
their bottom line. Nair did point out that political risks (export prohibitions, price ceilings,
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and debt write-offs) and production risks (farming practices, weather, and pests) are the main
systemic concerns. Market risk, or the possibility of suffering losses as a result of shifts in
market prices such as those of commodities, interest rates, and currency exchange rates is
another risk that is related. Agricultural economics theories and models are centered on
markets, prices, and price volatility (Adam M. Komareka, 2020). Credit risk is the possibility
of suffering a loss if a counterparty defaults on its financial commitments. The possibility that
a business won't have enough cash on hand to cover its immediate expenses because it can't
turn its assets into.
Agribusiness have some of the main methods used in risk management. There are many
instruments and approaches available for managing financial risks, all aimed at helping
business entities minimize the impact of their losses. One of the well-known risk
management approaches is hedging.
Hedging is the process of offsetting possible losses on other investments using financial
instruments like futures, options, and swaps. Other hedging technic that may be considered is
that risk is transferred to an insurance firm in return for premium payments through
insurance. Risk transfer is the legal practice of assigning a party's risk to another, as in
partnership. Outsourcing or investing in a variety of assets can help diversify and lessen
exposure to any one risk. Avoiding risk means deciding not to participate in activities that
pose a lot of danger. Retaining risk, acknowledging it, and setting aside money for possible
losses.
3.0 Key Financial Risks for Agribusiness
Agribusiness operations and profitability can be greatly impacted by a number of major
financial risks. The primary financial risks for this business could be Commodity Price Risk,
weather, global supply and demand, and geopolitical events are just a few of the variables
that can cause prices of crops, livestock, and other agricultural products to fluctuate
significantly. Profit margins and revenues may be impacted by this volatility.
Crop failures, lower yields, and higher expenses for irrigation and other climate mitigation
measures can result from weather risk, erratic weather patterns, natural disasters, and climate
change. adverse weather conditions that have an effect on livestock health and crop yields.
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Supply chain disruptions that impact input availability and product delivery are known as
supply chain risks. The distribution of products and the delivery of inputs can be delayed by
these disruptions brought on by pandemics, transportation problems, or other unanticipated
events, which can have an impact on revenue and sales.
Regulatory Risk, modifications to agricultural laws and policies that may have an effect on
business operations. Modifications to environmental laws, food safety standards, and
agricultural policies may result in higher operating costs and the need for major practice
changes.
Credit risk refers to the possibility of partners or customers missing payments. These
systemic risks have an impact on lenders as well as producers. Individual risks include those
to the borrower's life, health, or property; additionally, there are risks to the lender from
willful default, inaccurate creditworthiness assessments, or incorrect pricing (Nair, 2022). By
providing borrowers with access to risk management tools and by utilizing procedures and
instruments that enable them to evaluate and control their own credit risks more effectively,
lenders can reduce risk.
Prioritizing these risks involves assessing their potential impact and likelihood. For example,
commodity price risk and weather risk may be prioritized higher due to their significant
impact on revenues and operational stability.
4.0 Hedging Strategy for Agribusiness Risk Management
An agro-farming company may use commodity futures and options as part of a
comprehensive hedging strategy to lock in livestock and crop prices and guard against
unfavorable price fluctuations. To guarantee a selling price for their crop prior to harvest, a
corn farmer can sell corn futures. Hedging offers several significant benefits, particularly for
businesses and investors looking to manage financial risks, the primary benefit of hedging is
the reduction of risk (Andrés Jerónimo Arenas Falótico, 2023)
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Reducing reliance on a single source of income and spreading risk can be achieved by
diversifying products, crops, or geographic areas. If a farmer grows both soybeans and corn,
the risk of one crop failing can be reduced.
With buyers, contract farming can provide more dependable and steady income streams. A
vegetable farmer enters into a contract with a chain of supermarkets to provide a certain
amount of produce for a set price.
Possessing of multiple supply chain stages through vertical integration can increase cost
control and lessen exposure to market volatility. Owning feed mills, hatcheries, and
processing facilities allows a poultry business to better control input costs and supply chain
risks.
Hedging with currencies Currency hedging can offer protection against fluctuations in
exchange rates for agribusinesses engaged in international trade. The companies frequently
trade internationally, bringing in machinery and other inputs like fertilizer and exporting
finished goods. They run the risk of currency fluctuations as a result, which could affect their
profitability and stability. In this scenario, the company may lock in exchange rates for
upcoming sales using currency forwards or options.
Strategic Reserves, by keeping supplies of essential products or inputs on hand can act as a
safety net against price increases or disruptions in the supply chain. For instance, a grain
elevator may stockpile extra grain for sale during spikes in prices or scarcities. Feed
Reserves: During times of price volatility or scarcity, livestock operations may keep feed
reserves to guarantee a consistent supply. Fertilizer Stockpiles: Keeping a supply of fertilizers
on hand guards against price increases and supply chain disruptions while securing input
supply for planting seasons that are crucial.
According to Rehman and Abdur, the differences between the purposes of merchandise
exchange, objects of trade, manners of trade, guarantees of performance, manners of session,
places of trade, scopes of merchandise, and the degree of the market norm, the forward
contract can be seen as a kind of spot transactions. Forward contracts allow agribusiness to
hedge risks by entering into agreements to buy or sell agricultural products at predetermined
prices in the future.
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Insurance Contracts, Following the collection of insurance premiums, insurance companies
reimburse damages in accordance with the terms outlined in an insurance contract. Getting
insurance for your cattle and crops to guard against disease and natural disaster losses.
Certain risks, like crop failure, natural disasters, or livestock diseases, can be covered by
insurance policies. Farmers are shielded by insurance from losses brought on by illness, pests,
and bad weather. For example, OMD may buy crop insurance to cover losses due to drought.
Nonetheless, certain risks are not covered by insurance because of their conditions, making
them non-insurable. These risks are mostly brought on by farmers' incorrect attitudes.
(Andrysík, Marek, 2018)
5.0 Conclusions and Recommendations
5.1 Summary of Findings
The major financial risks for the agro-farming company have been identified and prioritized
in this risk assessment report. These risks include supply chain risk, weather risk, regulatory
risk, credit risk, and commodity price risk. To reduce these risks, a comprehensive hedging
strategy including forward contracts, insurance policies, weather derivatives, commodity
futures, and options has been suggested. A thorough analysis of how the recent financial
crisis has affected risk management procedures has shown how important it is to strengthen
regulatory oversight, stress testing, risk reporting, and governance.
5.2 Recommendations
To put detailed Hedging Strategies into Practice and use a variety of financial tools to protect
the business from weather and commodity price risks.
Boost Risk Reporting and Monitoring, by Keeping an eye on risk exposures at all times, and
update stakeholders on a regular basis.
Boost Risk Management, to supervise risk management operations, form a specific risk
management committee.
Put Money into Technology, for improved risk assessment and mitigation, make use of
cutting-edge risk management software and tools.
Continue to Adhere to Regulations: Ascertain adherence to the latest regulatory mandates in
order to evade sanctions and augment fiscal steadiness.
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By adopting these recommendations, the agro farming company can effectively manage its
financial risks and ensure long-term sustainability and profitability.
6.0 References
i. Adam M. Komareka, A. D. (2020). A review of types of risks in agriculture: What we
know and what we need to know. Agricultural Systems, 178.
ii. Andrés Jerónimo Arenas Falótico, E. S. (2023). Futures contracts as a means of
hedging market risks. Aibi research, management and engineering journal, 42-51.
iii. Konstantakopoulou, I. (2023). Financial Intermediation, Economic Growth, and
Business Cycles. Risk and Financial Management.
iv. Marek Andrysík, L. L. (2018). RISK MANAGEMENT IN AGRICULTURE. Mendel
University in Brno.
v. Mark Carey, R. M. (October, 2004). The Risks of Financial Institutions. University of
Chicago Press, (pp. 1-6). chicago.
vi. Nair, A. (2022). Financing Agriculture: Risks and Risk Management Strategies .
Nairobi: Agribanks Forum.
vii. Ndubuisi, W. C. (june, 2018). Anatomy of Finance. Akwa : Department of Banking
and Finance,University of Uyo, Uyo,Akwa Ibom State,Nigeria.
viii. Rehman, W. J. (2016). Risk Management in Agriculture. Theories and Methods . New
york: Science Publishing Group.
ix. Sibindi, A. B. (2016). DETERMINANTS OF CAPITAL STRUCTURE. Risk
Governance & Control: Financial Markets & Institutions.
