vegetables

40
Economic Update
Tips on risk management
and planning for
vegetable growers
R&D
R&D
Market & Farm Productivity,
Value Chain Resource Use
Development & Management
VEGETABLE GROWERS FACE A VARIETY OF UNCERTAINTIES
AND RISKS IN MANY ASPECTS OF THEIR BUSINESSES, FROM
UNEXPECTED WEATHER EVENTS TO CHANGING MARKET
PRICES. AUSVEG ECONOMIST ANDREW KRUUP EXPLAINS
HOW GROWERS CAN MANAGE THE RISKS TO THEIR FARMS
AND ULTIMATELY THEIR PROFITABILITY.
Risk is often described as a
situation involving exposure
to danger under conditions of
uncertainty. In the vegetable
industry, there are many
decisions that are made by
growers under conditions of
uncertainty that could expose
both their businesses and their
livelihoods to financial danger.
This is because risk plays a large
role in determining the variation
in yearly profits.
Why doesn’t a farm with
a consistent area harvested
and a consistent crop yield
therefore consistently make
the same profit every year? It
may be due to the uncertainty
of future prices for the crop
produced, or the variation in
input prices (such as labour),
or it could be because of a
drought that is affecting the
industry. All of these examples
involve situations of uncertainty
that can damage a growing
operation’s financial stability and
ultimately threaten to reduce
business longevity.
Defining risk
Table 1: An example of expected value calculation
Risk can be defined in
different layers, which often
require various responses and
management procedures to
overcome them. The standard
risk layer includes variations in
production, prices and input
costs and does not usually
require a specific government
policy to overcome it. However,
these risks can be directly
managed through strong
business strategy and planning.
The second layer includes
large-scale events that
can have lasting effects on
many or all farmers within a
geographic region. Examples
of risks within this layer include
disease outbreaks and severe
weather damages. Often this
layer of risk will require a
government or industry policy
response in conjunction with
risk management planning to
coordinate a group response to
the danger.
In between these two layers
lies yet another layer of risk,
which includes dangers that
are between the two extremes.
These risks are serious;
however, there are market tools
Situation Probability of event occurring Crop value based on outcome
Price remaining the same 60% 1,000 x 377 = $377,000
Price increasing 10% 1,000 x 400 = $400,000
Price falling 30% 1,000 x 330 = $330,000
available which can be used
to mitigate the losses that can
be caused. These market tools
include the use of insurance,
future contracts or cooperative
agreements between small
groups of growers.
Quantifying negative risk
To design a strong risk
management plan to help deal
with your farm’s exposure to
risk, it is important to develop
a process to quantify risk and
to describe its likely impacts on
income variability.
The standard procedure
used in economics is to
calculate an expected value
from undertaking a particular
activity by taking into account
the probability of another,
unplanned event occurring. The
expected value is calculated
as the sum of all the possible
outcomes multiplied by their
probability of occurrence.
For example, a grower
produces 1,000 tonnes of
carrots each season and initially
estimates that the crop is likely
to be worth $377,000 in 2016