INSURABLE RISKS IN THE AGRICULTURAL VALUE CHAIN
The terms risks and uncertainty are associated with the exposure to events that can result in losses. Although these terms are often used interchangeably, risk can be defined as the imperfect knowledge of an event where the probabilities are known, whereas uncertainty exists where these probabilities are not known. However in whatever form or manner these terms are used they often carry with them a trail of losses whenever they occur. Expectedly the Agricultural business is not exempted from these losses, as many of the expected losses from the risk facing agricultural value chain systems are related to uncertain events with unknown probabilities.
THE AGRICULTURAL VALUE CHAIN CONCEPT
The Agricultural value chain concept covers the range of activities agricultural investors carry out in the creation and movement of agricultural products from the farmers to consumer tables. From the providers of inputs (Fertilizers, seeds, irrigation and equipment), producers/ providers of storage, financiers, technical and management support, distribution providers, processors to the wholesalers/retailers and exporters responsible for getting the products to the consumers are joined up and have a full understanding of the chain. Each player has a direct link with the next to form a strong and viable chain.
SYPNOSIS OF RISKS ACROSS THE AGRICULTURAL VALUE CHAIN
Some of the risks affecting the agricultural value chain include the following:
THE IMPACT OF RISKS ON THE AGRICULTURAL VALUE CHAIN
Agricultural risks tend to affect the whole agribusiness value chain. Each of the participants along the entire chain from the suppliers of inputs to the end consumers are subject to these risks which result in losses to Agricultural investors. For example, farmers and other agricultural investors across the value chain, face a variety of market and production risks that make their incomes unstable and unpredictable from year to year.
Input prices may increase out of reach, crops may be destroyed by drought or pest outbreaks, selling prices may plummet, harvests may rot in poor storage facilities, agro processing facilities may be gutted by fire and agricultural raw materials may be destroyed while in transit. All these events will result in enormous financial losses to agribusiness investors. The management of these risks therefore should be paramount in the mind of the participants along the agribusiness value chain. This is to ensure that they do not result in financial losses thereby jeopardizing their investment.
AGRICULTURAL VALUE CHAIN RISK MANAGEMENT
Agricultural risk management involves choosing alternatives for reducing the effect of risks in the agricultural value chain and in doing so, positively affecting the farmer’s welfare position. Agricultural risk management relies on an optimal combination of technical and financial tools. The participants in the Agricultural value chain can use several tools, wherever they are available to deal with these multiple sources of Agricultural risks.
Agricultural value chain participants may avoid risk; for instance, by choosing not to select a particular crop or crops which they consider to be of high risk for the area where their farms are located. They may also mitigate risk; they may seek to lessen the risk through, for example, planting crops only in very favourable conditions or developing further their infrastructure to improve irrigation or minimize the effect of flooding. Lastly, they may transfer all or part of the risks to a third party through an insurance contract. They may mitigate the financial effects of these risks by the creation of contingency reserves from profits in good years- a form of self insurance.
Some other forms of the risk management strategies include:
ENTERPRISE DIVERSIFICATION: One effective method of reducing income variability on the farm is to diversify the enterprise by combining different production process. Diversification can include planting different crops, keeping a combination of different crops and livestock, or planting different variations of the same crop (e,g red and yellow maize). Effective diversification occurs when low income from one enterprise is simultaneously offset by satisfactory or high income from other agricultural enterprise.
CONTRACT PRODUCTION: Contract production occurs when an agribusiness coordinates all aspect of an agric product from production to retail. Contract production is gradually becoming a common feature in the crop, poultry and livestock industry in Nigeria. For instance, in poultry, the agribusiness provides feeds and other inputs to the producer, who in turn manages the out-growers process.
With this production contract, the agribusiness (usually a processor) commits the producer to deliver a specific quality and quantity of the final product. The producer must comply with the agric business quality and specifications and must manage the inherent risk with insurance and sound management practices. The current Anchor Borrowers Program initiative of the Central Bank of Nigeria (CBN) is an apt example of managing risks of rice production through contract farming.
APPLICATION OF NEW TECHNOLOGIES: Improved seeds and precision farming are two examples of managing risks in agricultural production. Some seed varieties are developed to provide resistance to weeds thereby aiding the facilitation of improved weed control. While others are improved to provide resistance to diseases and insects. Precision farming controls the rate of the application of crop inputs such as seeds, fertilizer and pesticide in the fields on a per hectare basis. The conventional approach by contrast applies the same rate across the entire field. The method of farming allows yields to be measured for each hectare so that outputs are measureable against crop inputs.
The benefits associated with adopting new technologies include lower input costs, higher crop yields due to improved pest control and cost effective use of inputs.
AGRICULTURAL INSURANCE: The concept of insurance transfers the risk of the agricultural enterprise from the farmer to others for a price which is stated as an insurance premium. It is an example of a risk management tool that protects against losses and also offers the opportunity for more consistent gains.
INSURABLE RISKS IN AGRICULTURAL PRODUCTION: Majority of the risks in agricultural production that can be insured are mostly due to damaging/adverse weather conditions or natural disasters, which among others include drought, dry spells, flood, excessive heat and moisture, storm, insect and pest damage, diseases, etc.
WHAT IS AGRICULTURAL INSURANCE?
In general, insurance is a form of risk management tool used to hedge against a contingent loss. It is a social and economic device which provides financial compensation against the effect of any misfortune on the insuring public.
Agricultural insurance therefore is a financial tool used to transfer the risks inherent in the Agricultural value chain to a third party (usually an insurer) via the payment of a premium that will reflect the true long term cost to the insurer assuming those risks.
Therefore the Agricultural Insurance contract remains a veritable and important tool in transferring the risks inherent in the Agricultural business. This is because the Agricultural Insurance policies will protect the Agricultural investor against unforeseen circumstances (risks) which may result in losses, by way of indemnification. (Compensation) It will also serve as securities for banks as the compensation for financial losses suffered by agricultural investors from damages to their investments and will provide funds for the servicing of such loans.
THE ROLE OF THE NIGERIAN AGRICULTURAL INSURANCE CORPORATION IN THE MANAGEMENT OF RISKS ACROSS THE AGRICULTURAL VALUE CHAIN.
Investment in Agriculture may still remain an unprofitable venture if it is bedevilled by risks that are beyond the control of the agric investor, especially those risks that have to do with the vagaries of weather (adverse weather conditions). Agricultural risks, not only affect farmers, they also affect the whole agribusiness value chain. Each of the participants along the supply chain, from the suppliers of inputs to the end consumers are subject to these risks. As the interconnections between the participants in the value chain are becoming more close and complex the possibilities of adverse events being transmitted between participants are increasing.
In essence, if these risks are not properly managed and tackled the heavy financial investment across the entire Agricultural value chain will be in jeopardy. Agricultural risk management relies on various strategies to deal with this multiple sources of risk across the entire Agricultural value chain. The role of the Nigerian Agricultural Insurance Corporation is therefore to manage these risks using Insurance as a risk mitigation and management tool. This concept deals with the transferring of all or part of these risks to a third party through an insurance contract.
NAIC’S CONTRIBUTION TO THE RISK MANAGEMENT OF THE AGRICULTURAL VALUE CHAINS
The Nigerian Agricultural Insurance Corporation (NAIC) since its establishment has made considerable contribution in fixing the risks in the Agricultural Value Chain by providing the appropriate insurance cover for virtually all known risk exposures across the value chain. A summary is highlighted below:
The Nigerian Agricultural Insurance Corporation being the foremost insurer of agriculture related risks has the experience of over two and a half decades in agricultural insurance underwriting. It is our utmost desire to remain the market leader in this regard. Therefore, it is our intention to continue to provide adequate insurance cover using various customized products, across the entire agricultural value chain for all risks to ensure that the huge financial investment in agriculture remains protected. All Agricultural investors across the value chain are encouraged to take advantage of NAIC’s expertise and experience in underwriting these risks to ensure that their huge investments in this chain remain protected.