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Insurable Risks In The Agricultural Value Chain
01.07.2017

INSURABLE RISKS IN THE AGRICULTURAL VALUE CHAIN

PREAMBLE

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:

  • PRODUCTION RELATED RISKS: Production risks are derived from the uncertain natural growth process of crops and livestock. It relates to the possibility that farm yield or output levels will be lower than anticipated. The major sources of production risks arise from inclement weather conditions such as drought, flood etc and loss or damage to the crops by pests and diseases.

 

  • MARKETING/PRICE RISKS: This is the possibility of losing the market of the agric product or that the price received for the commodity will be less than expected. The common sources of marketing risks include: lower prices due to increase supply or decrease consumer demand; loss of market access due to the relocation of a processor or other buyers; and lack of marketing power due to small size farm sellers relative to others in the  market.

 

  • FINANCIAL RISKS: This relates to the possibility of having insufficient cash to meet expected obligations, lower than expected profit and loss of net worth. Sources of financial risks results from the production and marketing risks described earlier. In addition, financial risks may also be caused by increases in key input costs, increase in interest rate, excessive borrowing, lack of adequate cash or credit reserves and changes in exchange rates.

 

  • LEGAL AND ENVIROMENTAL RISKS:  In part, legal risks relate to fulfilling business agreements and contracts. Another major risk is tort liability i.e causing injury to another person or object as a result of negligence. Legal risk is also related to environmental liability and concerns about water quality, erosion and pesticide use.

 

  • HUMAN RESOURCES RISKS:  These are risks associated with individuals and their relationship with one and other, their families and farm business.  Sources of human resource risk include divorce, death or disability of business owner, manager, employee and family member. It may also include risks arising from poor communication and people management practices.

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:

 

  • AGRICULTURAL INPUTS (FERTILIZERS, SEEDS etc): NAIC has provided insurance services to various categories of clients during the production, importation and distribution of fertilizers, seeds and seedlings etc by using its transportation (Marine and Goods-In-Transit) policies. These policies take care of the risk involved in the importation and distribution of fertilizer, seedlings and other Agricultural Inputs.

 

  • STORAGE AND PROCESSING: NAIC has been able fix the risk exposures in the storage and processing infrastructure of the Agricultural Value Chain by the provision of insurance covers using our fire/special perils, burglary/theft and multiple perils insurance policies. These covers are provided in any part of the country where the storage and processing infrastructures are located.

 

  • PRODUCTION RISKS: NAIC has also provided insurance cover to agricultural investors involved in the primary production of all types of Agricultural items, be it crops and livestock. These covers are provided at subsidized premium rates using our multiple peril salvage based loss of investment crop insurance and various livestock insurance policies.

 

  • FARM INVESTMENTS RISKS: These include machineries, buildings and equipment.

 

  • MARKETING INSTITUTIONS: NAIC has been able to forge strategic alliances and work closely with the marketing institutions involved in the output value chain by the provision of risk management services using various Insurance products and policies. These policies have been able to protect the investments of these marketing institutions against various risks that results in losses. Furthermore, the statistics in database of the price of these Agricultural produce and commodities are used in our new product development processes.

 

  • FINANCIAL VALUE CHAIN: The Corporation has continued to link its Insurance Products to the loans provided by banks and other financial institutions to Agricultural investors engaged in the production, storage, Processing and marketing of the target commodities value chains in the various geo-political zones. The various NAIC policies covers the risks associated with weather and other non-weather perils. The linkage with the banks and other financial institutions has greatly assisted in the expansion of the financial sector lending to the entire Agricultural value Chain.

 

CONCLUSION

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.

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