Issue No 11, January 1999.

NOTICE: Hard copies of the Australian New Crops Newsletter are available from the publisher, Dr Rob Fletcher. Details of availability are included in the Advice on Publications Available.

5. Mapping a risk profile

[Most of this information has been extracted from the publication 'Rural Risk Management: Farming for the Future Seminar Workbook' prepared by Mike A Krause.

Mike was formerly with Agricultural Risk Management Pty Ltd and is currently with:
Applied Economic Solutions Pty Ltd
10 Warramunda Crescent
Banksia Park South Australia 5091
Telephone: 08 8396 7122
Facsimile: 08 8396 7133
Email: mkrause@iaccess.com.au

The Workbook was published by the Westpac Banking Corporation (1996).

Mike is currently running workshops around Australia to improve the understanding and management of risk in agriculture, using the Risky Business game, developed by the University of Western Australia]

The first step in determining a risk profile is to develop a check list of the areas of risk. These encompass the factors that are likely causes of future fluctuations in the profitability of the business.

These factors can be evaluated quantitatively (as accurate measurements) or qualitatively (as levels or descriptive states).

The second step could be to use one of the software packages available for carrying out sensitivity analyses for the quantitatively assessed factors.

Such analyses determine, one factor at a time, the effect that a 5% change in that factor would have on the profit realised by a business.

These risk factors can then be ranked in terms of sensitivity, that is, in terms of the effect each had on the profit.

Sensitivity analyses are limited in their applicability by two problems:

Qualitative factors cannot be subjected to this type of analysis
Changes of 5% may be inappropriate for some quantitative factors on some occasions.

As an alternative to this approach, each of the risk factors on the check list could be examined to determine:

What is the likelihood of an event occurring that would impact on the business?
What would be the impact if the event did occur?

Risk factors on the check list being considered might include:

1. Fluctuations in market conditions (mostly or all quantitatively measured risk factors)

prices
exchange rates
trading volumes
selling restrictions
production costs
terms of trade

2. Fluctuations in economic conditions (quantitative risk factors)

interest rates
land values
equity

3. Fluctuations in production conditions (mostly qualitative risk factors)

appropriate choice of crop and germplasm
appropriate management of all stages of the growth of the crop
seasonality and suitability of the prevailing weather conditions
incidence and management of pests and diseases
occurrence of natural and man-made disasters
availability of suitably trained labour
speed and efficiency of the rectification of mechanical breakdowns and recovery from natural disasters
avoidance of theft, vandalism or petty interference
nature of the long term land care management.

4. Fluctuations in personal qualities and management skills (mostly qualitative risk factors)

health
physical support
community spirit
availability of information and its quality and timeliness
rate of adoption of improved techniques and technology
skill and performance of all the farm staff.

Once the likelihood of an event and its likely impact has been evaluated for each risk factor, it is important to determine:

Is the risk factor important?
Can it cause major changes in the profitability of the business?
Which risk factors are currently managed well?
Which risk factors are currently not managed well?
How could the management of risk for these factors be improved?
Is risk minimisation the only approach available?
What action should be taken to improve the management of risk?

[Bruce Gardiner has further comments on risk management in this issue of the newsletter]

Any claims made by authors in the Australian New Crops Newsletter are presented by the Editors in good faith. Readers would be wise to critically examine the circumstances associated with any claims to determine the applicability of such claims to their specific set of circumstances. This material can be reproduced, with the provision that the source and the author (or editors, if applicable) are acknowledged and the use is for information or educational purposes. Contact with the original author is probably wise since the material may require updating or amendment if used in other publications. Material sourced from the Australian New Crops Newsletter cannot be used out of context or for commercial purposes not related to its original purpose in the newsletter

Contact: Dr Rob Fletcher, School of Land and Food, The University of Queensland Gatton College, 4345; Telephone: 07 5460 1311 or 07 5460 1301; Facsimile: 07 5460 1112; International facsimile: 61 7 5460 1112; Email: r.fletcher@mailbox.uq.edu.au

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originally created by: GK; latest update 6 June 1999 by: RF