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AgriBusiness“Farming fertile minds …… Growing fertile futures”

Risk Management

2 April 2009

“You cannot manage risks until you understand them.”

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Contents

1. Market principles within S A Agriculture.

2. Agricultural finance at a glance.

3. Funding requirements for a farming venture.

4. Risk and uncertainty

5. Information, Information- a perfect world (?)

6. Risk types and consequences

7. Risk Mitigation

8. Management Process

9. Conclusion

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Market principles within SA’s agriculture

Comments

• South African farmers face a 60% plus price exposure to the outside world and are therefore by implication global players in a global market.

• They therefore have very little control over pricing levels and tend to be price takers, with prices ranging between import parity and export parity depending on local supply and demand resulting in increased price volatility

• Factors influencing prices over which they have no control are international production trends, international farming subsidies, exchange rates, import and export tariffs.

• Production risk due to nature also contributes to production volatility which in turn lead to an increase in price volatility

• Farmers therefore have to manage PRICE and PRODUCTION if they want to make a success of their business

SA Rainfall trends

0

200

400

600

800

1000

Rai

n(m

m)

Rain 3 yr Avg Long-term Avg

SA Agricultural's Exposure to the International Market

05,000

10,00015,00020,00025,00030,00035,00040,00045,000

1980 1985 1990 1995 2000 2005

(R '0

00

)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Exports Imports Import + Exports as % of GPV

SA yellow maize prices (R/ton

200

700

1,200

1,700

2,200

2,700

3,200

3,700

J an-03 J an-04 J an-05 J an-06 J an-07 J an-08 J an-09 J an-10

Import Parity Export Parity Domestic

Cost curve

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Market principles within agriculture Cost curve

In the long term agriculture is experiencing a cost curve of approximately

3% per annum (The price of Farming requisites increases faster than

producer prices however for 2008/09 season a cost curve of more than

30% is expected).

To survive this, farmers need to become more productive (increase output

in relation to inputs) this is mainly done by:

• Improving production efficiencies (use of technology)

• Value adding

• Lowering fixed costs (economies of scale)

World agriculture is poised to enter a new growth phase that

will be much greater than colonization and industrialization.

• During the period of industrialization after the second world war,

agricultural production expanded exponentially, compared to the

growth in population (due to the development of fertilizer and

production machinery).

• Production of coarse grains, beef and mutton however peaked during

mid eighties due to availability of natural resources. Commodities

like poultry and pork continued to grow as they were able to utilize

surplus coarse grains.

• Production has once again started to increase due to advances in

bio-technology (GMOS etc.)

Production volumes will continue to increase thus improving

the survival potential of agriculture in general

Maize yield

-

1.00

2.00

3.00

4.00

5.00

6.00

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

(to

n/h

a)

World yields SA yields

Maize yield

-

1.00

2.00

3.00

4.00

5.00

6.00

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

(to

n/h

a)

World yields SA yields

Agricultural Cost curve trends (Index 1980 = 100)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Gross producer value Input cost

Finance

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Agricultural Finance at a Glance

Farm income and expenditure

0

2000040000

60000

80000100000

120000

140000160000

180000

69/70 73/74 77/78 81/82 85/86 89/90 93/94 97/98 01/02 05/06 09/10

Yearly Farm Debt Commitment Expenditure on InputsGross Producer Income Net Farm IncomeValue of Fixed Assets 50% margin

Finance farm level

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Capital requirements for a farming venture

Interest payments

capital payments

Annual production cost

Gross Farm Income

Net margin

Overheads and living costs

Based on surplus security

And surplus cash

Long-term loans based

on security and surplus capital

Pro

du

ctio

n f

inan

ce

Bas

ed o

n in

sura

nce

and

cas

hfl

ow

J1 J2 J3 J4 J5 etc.

Val

ue (

R)

Net loss

UNCERTAINTY

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Uncertainty refers to imperfect knowledge such as when the future outcomes of a decision are unknown

Risk and Uncertainty

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Utilize and build Info Intelligence and use it as decision base !!!!!!!

All infoNice hair

Perfect World (?) with information

Rainfall

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South Africa - Rainfall

•Scenario-based risk identification

Create and analyse various scenarios that trigger a threat

Probability of rainfall

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Probability (%)of Rainfall example Jul 08- Dec 08 as risk decision

Jul 08 Aug 08 Sep 08

Okt 08 Nov 08 Dec 08

Yields

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Maize scenario – answer sensitivity analysis questions

Maize yield

0

1

2

3

4

5

6

198

0/8

1

198

1/8

2

198

2/8

3

198

3/8

4

198

4/8

5

198

5/8

6

198

6/8

7

198

7/8

8

198

8/8

9

198

9/9

0

199

0/9

1

199

1/9

2

199

2/9

3

199

3/9

4

199

4/9

5

199

5/9

6

199

6/9

7

199

7/9

8

199

8/9

9

199

9/0

0

200

0/0

1

g20

01/0

2

200

2/0

3

200

3/0

4

200

4/0

5

200

5/0

6

season

t/h

a

Lichtenburg Heidelberg

Always take time to ask: “What if?”

Industry indicators

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Market Industry Indicators as example

INDUSTRY INDUSTRY RISK PRICE MOVEMENT INPUT COST INPUT COST MARGININDICATOR MOVEMENT MOVEMENT

2008 2009 2008/09 2008/09 2009/10 2008/09

Maize Sideways 38 - 46 % 10 - 15 %

Wheat Sideways 26 - 40 % 9 - 14 %

Sunflower Sideways 29 - 46 % 10 - 15 %

Sugar Sideways 45 - 50 % 12 - 16 %

Table Grapes Sideways 18 -22 % 8 -13 %

Wine Grapes Sideways 16 - 20 % 10 - 14 %

Deciduous Fuit Sideways 38 - 42 % 8 - 12 %

Citrus Sideways 23 - 28 % 10 - 14 %

Vegetables Sideways 33 - 38 % 10 - 14 %

Beef Sideways 8 - 10 % 8 - 10 %

Mutton Sideways 8 - 10 % 8 - 10 %

Pork Sideways 9 - 12 % 9 - 12 %

Dairy Upward 15-18% 10-15 %

Poultry Sideways 11 - 15 % 10 - 15 %

Timber Sideways 16 - 20 % 7 - 9 %

•Analyse your industry •Scan the horizon, looking for new issues•Regularly challenge your on-going process to identify new risks•Gather information relevant to agriculture business •Look both in the past and in the future for past events and future trends.

Are there things causing discomfort or keeping you awake at night?

Risk drivers

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Summary of Risks and Consequences

Types of risks Risk Consequences Natural : Risk of damage through Wind, storms, floods , drought etc.

Property damage Business interruption Personal liability

Resource risk: Risks associated with diminishing natural resources which influence profitability of business

Soil erosion Salienation Bush encroachment Loss of water quality and

quantity Persistent droughts

Production risks : risks which influence production processes and profitability

Diseases Availability of labour Availability of inputs Climatic conditions Mechanical breakdowns Technology

Market Risks: risks of price and volume fluctuations

Price decreases Produce quality Market access Exchange rate

fluctuations Consumer preference Input costs increases

Financial risks: Risks influencing the financial performance of a farming entity

Insufficient financial information

Insufficient cash flow Interest rates fluctuations Availibity of credit ? Debt structure

Types of risks Risk Consequences Strategy risk : risk which influence long term profitability

Change in Governments policy

Change in economic markets Change in technology Regulatory requirements

Human resource risks: risks in human resource capacity on the farm

Shortage to human resources Ineffective management Shortage to key staff Staff not motivated

Social risks : risks influenced by the business environment

Market reputation risk Loss in production due to

bad relations Loss to grow the business Food safety issues

Business Relations risk : risks influenced by business relations

Law risks Break in supply chain Trade disputes

Risk mitigation

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RISK MITIGATION

1. Supply risk

2. Price risk

3. Commodity risk (quality)

4. Ownership

5. Operational risk

6. Payment risk

7. Market risk

1. Finance – harvested commodity, warehouse receipt / silo

certificate. Contract growing.

2. Finance at discounted values – trigger levels or hedge with

futures.

3. Quality confirmation.

4. Advance funds to owner of the commodity

5. Transact with client who has a track record.

6. Ensure the prospective buyer has sufficient lines for

payment of the client’s stock

7. Production linked to market requirements

Risk Mitigation

Risk management

process

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Identify Risks

Continuously Improve

Risk Management

Monitor Risk

Response

Information for

Effective Decisions

Implement Risk

Response

Develop Risk

Responses

AssessRisks

Risk Management Process

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Identify finance opportunities taking risk into consideration

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No Risk Management-poor decisions and mitigation

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Result of Risk management and appropriate risk mitigation

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Conclusion

• The challenge for the Risk managers is to decide whether it is a reasonable risk and the information available to make decisions.

• In normal or good years, Agriculture will make a good profit, but in bad years the risk of poor returns could be threatening however this can be circumvented through risk mitigation tools available.

• A good Bank Risk manager will examine all the possible sources of risk and adopt a strategy that reduces the impact of a poor outcome.

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Summary -Finance opportunities, use info for decisions, risk mitigation and Score

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THANK YOU for the opportunity to share some ideas

Disclaimer: Although everything has been done to ensure the accuracy of the information, the Bank takes no responsibility for actions or losses that might occur due to the usage of this information.