After risk mitigation and transfer strategies have been assessed and implemented, the next step is to accept the remaining risk(s) and take measures to cope with them.
Risk coping involves strategies that are employed to confront and cushion the effects or consequences of risks in agriculture and other agribusiness enterprises. Such strategies are categorized as ex-post strategies.
Read Also: Aubrieta Flowers – All you need to Know
Liquidity
A risk coping strategy used by farmers to manage financial risk is liquidity. It involves the farmer’s ability to generate cash quickly and efficiently to meet financial obligations. The liquidity issue relates to cash flow and addresses the question: “When adverse events occur, does a farmer have assets (or other monetary sources) that can easily be converted to cash to meet financial demands?”
Asset liquidity depends on the relationship between the firm’s assets and the expected cash proceeds from the sale of each of those assets. An asset is perfectly liquid if its sale generates cash equal to or greater than the reduction in the value of the firm due to the sale.
Illiquid assets, in contrast, cannot be quickly sold without the producer accepting a discount, reducing the value accruing to the firm by more than the expected sale price. Examples of liquid assets include grain in storage, cash, and company stock holdings, while illiquid assets include land, machinery, and other fixed assets.
Factors that influence liquidity include the marketability of the asset, the length of time allowed for liquidation before the cash is needed, transaction costs, and the asset’s income-generating role in the firm.
Liquidity management is interrelated with risk responses in production and marketing, as well as with the farm’s degree of leverage. The more highly leveraged the farm, everything else being equal, the greater the need for careful liquidity management to make timely payments on loans and other farm financial obligations.
Some of the methods that farmers use to manage liquidity, and hence their financial risk, include the following:
1. Selling Assets
A producer’s willingness to sell assets is an important financial response to risk, particularly in crisis situations (Barry and Baker). If a farmer faces low net income in a given year, selling liquid assets (such as stored grain or non-farm assets, such as stocks) is a first step in meeting expenses for the year.
Holding liquid assets, however, may be costly because they typically earn lower returns than when used in the production process (assuming the economic viability of the operation).
If the use of liquid assets is not adequate to meet financial demands, additional steps such as the sale of less liquid assets may be necessary. Due to the fact that many farmers invest heavily in illiquid assets, such as land, livestock, and machinery, maintaining liquidity to meet shortfalls in returns may, at times, be difficult.
Read Also: Angelonia Flowers – All you need to know
2. Managing the Pacing of Investments and Withdrawals
Maintaining flexibility in the timing of farm investments and withdrawals is also a response to financial risk. In low-income periods, for example, a producer may postpone the purchase of new machines and other equipment.
This is an approach favored by many producers during times of adversity. It avoids large financial outlays during such periods, builds equity, reduces indebtedness, and allows the strengthening of profitability in a rapidly expanding farm operation (Barry and Baker). The more highly leveraged the farm, the greater the need for careful liquidity management to make timely payments on loans and other obligations.
Household Off-Farm Employment
Off-farm employment is a risk coping strategy. It provides a stream of income to the farm operator household that is more reliable and steadier than returns from farming. In essence, household members working off the farm represent a form of diversification.
Borrowing
Borrowing is another widely used risk coping strategy by farmers in response to agricultural risks, especially financial risks. Borrowing can be from formal and informal sources. Repeated borrowing, however, could lead to selling agricultural land, which is a very high-risk alternative.
Loan acquisition, especially from informal sources, often eats into the profits that will eventually accrue to the farmers due to high interest rates. With respect to formal sources, bureaucracy and the demand for collateral (in the form of land and buildings) attached to loan procurement often result in the emergence of another risk.
Disaster Relief Grants
The consequences of certain risks in agricultural production can be so disastrous and financially enormous that they require assistance from governments at all levels. Governments and non-governmental organizations often respond to the clarion call of farmers by providing disaster relief grants.
This was the experience of poultry farmers in Nigeria in 2012 when there was an outbreak of avian flu that claimed several thousands of birds.
Risk coping involves strategies that are employed to confront and cushion the effects or consequences of risks in agriculture. There are different means of coping with agricultural risks, including liquidity management, off-farm employment, borrowing, and disaster relief grants.
Do you have any questions, suggestions, or contributions? If so, please feel free to use the comment box below to share your thoughts. We also encourage you to kindly share this information with others who might benefit from it. Since we can’t reach everyone at once, we truly appreciate your help in spreading the word. Thank you so much for your support and for sharing!
