Risk management strategy as a success factor

Transcription

1 Strategi för riskhantering som framgångfaktor. Hur gör man i Danmark? KSLA-Seminarium Michael Friis Pedersen Risk management strategy as a success factor How is it done in Denmark? Background Up to the GFC not a lot of focus on risk management Agricultural Policy / CAP crowded out market based risk management (hedging) (OECD, 2009; 2011) Access to credit may also have crowded out market based risk management Why hedge if you can borrow? Access to credit for farmers probably easier in Denmark than most other places in the world (up to the financial crisis)

2 Self-financing rate (Cash Flow 1 / Gross Investment) FADN 3... Risk management strategy as a success factor The project Helhedsorienteret risikostyring From 2009 to 2011 An Enterprise Risk Management inspired approach to agricultural risk management Key challenge: Balancing simplicity and the holistic approach

3 Risk management strategy as a success factor What is risk? In the project risk is defined as the factors that can keep the farmer from reaching strategic goals Usually in the form of economic loss An idea about the strategic goals for the farm is a must with regard to risk management 5... The basic concept The strategic goals for the farm (firm) Map the farms risk exposure Assessment and prioritization Choose coping strategy Implement and follow-up

4 The basic concept 7... Mapping - Financial risks Interest rate exposure Fixed or variable rate mortgages Fixed interest SWAP s FX exposure FX loans FX SWAP s Leverage Interest only loans Liquidity reserves including credit reserves

5 Mapping - Human risks Access to labor What happens if the farm manager gets a new job? Injury What happens if you break a leg Divorce What happens in case of divorce Death Succession planning 9... in this world nothing can be said to be certain, except death and taxes (Benjamin Franklin, 1789) Mapping - Market risks Key inputs Volatility Exposure Substitutes Contracts Key outputs Volatility Exposure Contracts Integration of crop and animal production

6 Mapping - Production / Operational risks Yield risk Weather risk What happens if the harvest fails? Disease Animal health economics What happens if mortality increases? Mapping - Institutional risks Policy International WTO Basel accords CAP National Environmental regulation Milk quota price? Financial system Local Urban development / expropriation etc

7 Assessment and prioritization Assess and quantify Likelihood x impact Likelihood Very low, Low, High, Very high Impact No, Minor, Serious, Catastrophic Prioritize Focus energy on core problems Choose coping strategy Coping Strategy Four general risk coping strategies: Avoid Reduce Transfer Accept

8 Coping Strategy Avoid Don t fly if you want to avoid the risk of a plain crash Don t get married if you want to avoid the risk of devoice Obviously a costly strategy in some cases Don t borrow money in currencies where you have limited economic activity and avoid FX risk exposure Often the (subconscious) default strategy Coping Strategy - Reduce Reduce probability and / or impact Probability No flammable liquids next to open fire Preventive treatment with pesticides Hygiene in animal housing Impact Fire doors Post-exposure treatment of crops or animals Diversification

9 Coping Strategy - Transfer Insurance Institutionalized diversification Transfers risk from farmer to insurance company Fire Crop / hail insurance Weather insurance (index based) Finance Fixed interest loans transfers interest rate risk from borrower to lender at a premium Cooperatives Risk sharing Coping Strategy - Accept No risk, no gain Accepting risk is risk retention The key challenge is to retain the risks where other coping strategies are too costly

10 Coping Strategy Eliminate threats while retaining opportunities Implement and follow-up Execute the risk coping strategy Evaluate and follow-up Monitor risk exposure Change risk coping strategy if necessary Balance simplicity and the holistic approach

11 The risk wheel / Risikohjulet Thank you! Questions? 5. november