The management of risk involves a process that indicates such a task is not expected to be taken casually by farmers or their representatives if the end result is to be beneficial to the farmers and the business enterprise.
This is in view of the fact that the essence of risk management calls for actions such as risk identification, risk assessment, evaluation of risk, and, above all, determining the appropriate strategies to manage them. This article, therefore, focuses on discussing the necessary process of risk management.
Objectives of Risk Management Process
Risk management is a process that provides assurance that:
i. Objectives are more likely to be achieved.
ii. Damaging events will not happen or are less likely to happen.
iii. Beneficial outcomes will be, or are more likely to be, achieved.
iv. Losses will be reduced.
v. Income variability will be reduced if it cannot be totally eliminated.
Risk management is not a process for avoiding risk. The aim of risk management is not to eliminate risk but to manage the risks involved in all farming activities to maximize opportunities and minimize adverse effects. Risk management is not the management of insurable risks. Insurance is an important way of transferring risk, but most risks will be managed by other means.
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Steps in the Risk Management Process
The risk management concept enables a systematic and realistic framework to be established for accident prevention. It refers to the whole process of:
- Risk identification.
- Risk estimation.
- Risk evaluation.
- Establishment of control measures.
- Implementation of control measures.
This risk management process can be further divided into two distinct stages. The first stage concerns understanding the “problems” (fact-finding), while the second stage concerns the “solutions” to the problems. The first stage encompasses the processes of risk identification and risk assessment, while the second stage encompasses the process of risk evaluation, establishment of control measures, and implementation of control measures.
1. Risk Identification
The first step in risk management is risk identification. Knowing and appreciating the risks one faces is critical to designing effective management responses. The objective is to reveal all possible potentials for harm or damage that exist in a particular agricultural production or enterprise being analyzed. If this step is not conducted properly, the entire risk management scheme would be affected.
Such identification actions by the organization are focused on generating relevant information on sources of risk, hazards, risk factors, perils, and exposure to loss.
To properly recognize the operational risks of a particular farm enterprise, there is a need for farmers or farm managers to have thorough knowledge of:
i. The farm enterprise (crop farming, livestock, aquaculture, apiculture, etc.).
ii. The market in which it operates.
iii. The legal, social, economic, political, and climatic environment in which it does its business.
iv. The financial strengths and weaknesses of the crop or livestock enterprise.
v. Its vulnerability to unplanned losses.
vi. The production and management systems of the enterprise.
Many analytical methods have been developed for use in hazard identification. The appropriate method or mix of methods should be selected to enable the process to be conducted “systematically” to achieve better coverage of hazards.
2. Risk Estimation
The second step is to measure the likelihood the risk will occur and the potential negative impact by assigning probabilities and outcomes. This is a particularly difficult step because of the subjective nature of many of these measurements.
However, this only underscores the importance of accurately measuring those variables for which reliable, objective measures are available. After risks have been identified, they will need to be further analyzed to define the effects of risks on production and farmers’ income.
Risk estimation will provide information on the relative severity of the various risks, the crops, animals, or other aspects of agricultural production that will be affected, and thereby signify the enterprises and assets that must be protected or the people to whom protections must be provided.
As previously defined, risk is “a measure of the probability and severity of adverse effects.” Therefore, in the “risk estimation process,” the consequences as well as the probability of occurrence of those hazards identified are assessed.
3. Risk Evaluation (Acceptability Evaluation)
The third step in the risk management process is risk evaluation. Risk evaluation is the making of an overall judgment on the importance of a risk to determine its acceptability. Based on risk estimation, an evaluation is then made as to whether the risk is acceptable or whether additional safety measures are necessary to reduce the risk to an acceptable level.
Risk assessment is very much a subjective judgment. However, by following certain principles, the subjectivity in risk assessment can be minimized.
4. Establishment of Control Measures
Risks can normally be reduced through one or several safety measures. The reduction can apply to either the consequences or the probability that they will occur. The control measures may be through “engineering controls” or “administrative controls.”
i. Engineering Controls refer to hardware such as guards, barriers, or contouring against erosion.
ii. Administrative Controls refer to software issues such as safe working procedures, safety systems (e.g., crop rotation, use of organic fertilizer instead of inorganic fertilizers, etc.).
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5. Implementation of Control Measures
Appropriate control measures are put to work at this stage. It may take a long while to implement the measures because considerable time may be needed for training, equipment purchases, installation work, and often the need to overcome resistance to change.
The process of risk management, as mentioned above, is a continuous process that is never-ending. Some risks may have been overlooked and need further identification, and new risks may be introduced over time, requiring the whole process to be performed again. Furthermore, the residual risk of certain risks may also need to be assessed to evaluate their acceptability after appropriate control measures have been implemented.
Benefits of Risk Management
The benefits of risk management can be viewed from three angles: the benefits of risk management to the farm enterprise, the national economy, and to farmers and farm workers.
1. Benefits of Risk Management to the Farm Enterprise
i. An effective risk management system supports strategic and enterprise planning.
ii. It supports the effective use of resources.
iii. Risk management promotes continuous improvement in agricultural production.
iv. Risk management enables farm enterprises to quickly grasp new opportunities.
v. It helps internal audits of each farm enterprise.
vi. It improves the credit status of the farm business.
2. Benefits of Risk Management to the National Economy
i. The benefits accruing to various farm business enterprises will invariably enhance the positive development of the national economy.
ii. Effective risk management will increase foreign exchange earnings from the agricultural sector, thereby reducing the nation’s dependence on food imports and other agricultural products.
iii. Efficient risk management will reduce wastage on the farm and in relation to damage and destruction of farm equipment.
3. Benefits of Risk Management to Farmers and Workers
i. Risk management will result in higher productivity for farmers, family labor, and hired labor.
ii. Higher productivity of farmers and the labor force will, in turn, increase the gross national product of the economy.
iii. Farmers and hired workers are guaranteed peace of mind, and their needs, wants, and aspirations are guaranteed because the pain, sickness, injury, and property loss associated with operational risks are reduced to bearable limits.
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