1 AgriBusiness “Farming fertile minds …… Growing fertile futures” Risk Management 2 April 2009 “You cannot manage risks until you understand them.”

2 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

3 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 Cost curve

4 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 Finance

5 Agricultural Finance at a Glance Finance farm level

6 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 Production finance Based on insurance and cashflow J1 J2 J3 J4 J5 etc. Value (R) Net loss UNCERTAINTY

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

8 Utilize and build Info Intelligence and use it as decision base !!!!!!! All info Nice hair Perfect World (?) with information Rainfall

9 South Africa - Rainfall Scenario-based risk identification Create and analyse various scenarios that trigger a threat Probability of rainfall

10 Probability (%)of Rainfall example Jul 08- Dec 08 as risk decision Jul 08Aug 08 Sep 08 Okt 08 Nov 08Dec 08 Yields

11 Maize scenario – answer sensitivity analysis questions Always take time to ask: “What if?” Industry indicators

12 Market Industry Indicators as example 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

13 Summary of Risks and Consequences Risk mitigation

14 RISKMITIGATION 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

15 Identify Risks Continuousl y Improve Risk Management Monitor Risk Response Information for Effective Decisions Implement Risk Response Develop Risk Responses Assess Risks Risk Management Process

16 Identify finance opportunities taking risk into consideration

17 No Risk Management-poor decisions and mitigation

18 Result of Risk management and appropriate risk mitigation

19 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.

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

21 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.