Chapter Two: Risk Analysis and Sources of Risk

2.1. Production Risk

 Production risk is the risk associated with production losses.
 Production risk occurs because agriculture is affected by many uncontrollable
events that are often related to weather, including excessive or insufficient
rainfall, extreme temperatures, hail, insects, and diseases.
 Technology plays a key role in production risk in farming.
 The rapid introduction of new crop varieties and production techniques often
offers the potential for improved efficiency, but may at times yield poor results,
particularly in the short term.
 In contrast, the threat of obsolescence exists with certain practices (for example,
using machinery for which parts are no longer available), which creates another,
and different, kind of risk.
 Production Risk...
 Production risk – includes weather, insects, disease, technology,
and any other events that directly affect production quantity and
quality.
 Production risk stems from uncertainty of factors that affect the
quantity and quality of farm produce.
 It also arises with the introduction of new technologies.
 Several strategies can be used to reduce production risk.
 The main instrument considered to tackle production risk in general is
insurance.
 Production Risk...
 Output of crops and livestock is subject to change due to weather,
diseases, insects, weeds and inadequate technology.
 These factors cannot be predicted accurately and hence results in the
variability of the output.
 Thus, the production-risk is not confined to any one factor, but
combination of different factors.
 However, weather risk and technical risk are the most important
components of production risks.
 2.1.1. Risk-reducing inputs

Risk-reducing inputs are production inputs that improve the

chances of better quantity or quality of farm products.
Fertilizers and compost are used to reduce the risk of low yields.
Pesticides and Integrated Pest Management (IPM) practices are used
to reduce the risk of crop damage.
Irrigation is used to reduce the risk of low rainfall.
 Risk-reducing inputs...
 Not all inputs necessarily reduce risk.
For example, even if fertilizer is used, the crop still depends on rainfall, which may
or may not be favourable.
When soil moisture levels are low, using fertilizer can still result in low yields.
 Risk-reducing inputs must be weighed against the cost of using them.
 Farmers, however, do not experience only one kind of production risk at a time.
 They often experience the risk of unfavourable weather, pests and weeds at the
same time.
 Using a single risk-reducing input, such as drought-resistant seed will not
prevent low yields caused by pest and insect damage.
 Risk-reducing inputs...
 To determine whether an input will reduce the risk of low yields,
farmers must look at a number of factors at the same time.
 They should think about the effect the input is most likely to have on
their crop, given other factors that also affect production.
 For example, hybrid seeds may increase yields in years of good
rainfall but produce poorer yields than traditional varieties in years
when the rain is poor.
 Farmers must ask themselves whether the income expected by using
the input is high enough to compensate for the increased risk involved.
 Essentially, farmers must weigh up the costs and benefits of using
an input as a risk reducing strategy.
 2.1.2. Agribusiness planning under uncertainty

 Future outcomes are a function of today’s decisions.

 Although there is a high degree of randomness and uncertainty associated with the
future, you can increase the probability of a successful outcome by planning
ahead.
 This is true in nearly every aspect of our lives, both personal and professional.
 For those who operate their own businesses, planning becomes increasingly
important because the personal and professional aspects become more difficult
to untangle.
 In agricultural businesses, planning may be even more vital because of the
inherent uncertainty associated with agricultural production.
 Some important sources of uncertainty include production risk, price risk,
financial (or interest rate) risk, and changes in government programs.
 Agribusiness planning ...
 In order to develop a complete agribusiness plan, it is necessary to
recognize all the potential risks.
 The uncertainties are not limited to production, but to all facets of a
business.
 One of the most important documents for any business is their
business plan.
 It is common practice for consultants, lenders, potential business
partners, and other business-associated individuals to request a
business plan
 to make a more informed decision concerning their relationship
with a business.
 Agribusiness planning ...
 However, business plans have many more direct benefits for the business owner.
 The planning process forces owners to systematically consider all facets of
the business.
 In so doing, they become more knowledgeable of the business, the industry,
and the market environment in which their business operates.
 The process also helps to define business goals and to assess the impact that
uncertainty may have on future business outcomes.
 Perhaps most importantly, the written plan provides a well-defined direction
for the business.
 Therefore, it can be used to keep all employees moving toward the common
goals established within it.
 Agribusiness planning ...
 One of the most important things you can do to ensure success is to
plan for the future.
 The planning process may take many hours to complete, especially if it
is to provide a thorough representation of the firm.
 However, it will be a valuable asset as it forces a review of the firm and
the industry, unites the collective labor force of the firm to work toward
a set of common goals, and
 allows outsiders to gain a detailed understanding of the firm’s past,
present, and future.
 Agribusiness planning ...
 Business planning is not only applicable to large firms.
 Smaller agricultural businesses, which are often family-owned, stand
to benefit at least as much from planning as do larger firms.
 In agriculture, especially agricultural production, the small
compete directly with the large.
 Business planning will help firms of all sizes to better understand
their relative positions in the agricultural industry.
 It will also help the owner to set goals and devise strategies for
reaching those goals.
 2.2. Market Risk
 Marketing risk exists because of the variability of product prices and the
uncertainty of future market prices.
 It reflects risks associated with changes in the price of output or inputs that may
occur after the commitment to production has begun.
 Market risks largely focus on uncertainty with prices, costs, and market access.
 Sources of volatility in agricultural commodity prices include weather shocks and
their effects on yields, energy price shocks and asymmetric access to
information are additional sources of market risk.
 Market Risk ...

 Other sources of market risk include international trade,

liberalization, and protectionism as they can increase or decrease
market access across multiple spatial scales.
 Farmers’ decision-making evolves in a context in which multiple risks
occur simultaneously, such as weather variability and price spikes or
reduced market access.
 Market or Price Risk ...
 Price risk refers to variability in output prices and input prices.
 Input and output price volatility is important source of market risk in agriculture.
 Price variability is complex in nature and is often captured as price volatility.
 Price volatility refers to movements in prices of a certain periodicity: the period can
be a day, a month, a season or a year.
 Prices of agricultural commodities are extremely volatile.
 Output price variability originates from both endogenous and exogenous market
shocks.
 Marketing risk – prices and costs
 Changes in prices are beyond the control of any individual farmer.
 The price of farm products is affected by the supply of a product, demand
for the product, and the cost of production.*
 Supply of a product is affected by a combination of production decisions
made by farmers as a group and by the weather and other factors that
influence yields.
 Demand for a product is affected by consumer preference, consumers’
level of income, the strength of the general economy, and the supply and price
of competing products.
 Cost of production of a unit of product depends on both input costs and
yield. This makes it highly variable. Although input costs tend to be less
variable than output prices, when combined with yield variations the cost of
production becomes a serious source of risk.
 Types of Market Risks
 The risks associated with marketing are of three types, namely
physical risk, price risk and institutional risk.
1. Physical risk includes loss of quantity and quality. It may be
due to fire, rodents, pests, excessive moisture or temperature,
careless handling, improper storage, looting or arson.
2. Price risk associates with fluctuation in price from year to year
or within the year.
3. Institutional risks relate to a change in any policies, or rules
and regulations ruling the marketing aspects.
 2.2.1. Futures and options

 Farmers can transfer the risk of price instability through derivatives

markets.
 Insurance markets are used to cope mostly with production risk and
mitigate financial risk.
 A derivative is any financial instrument that gets its value from the
price of something else.
 Because it’s a derivative, the value of this agreement is based on the
predetermined and current price of the "something else."
 Futures and options...
 Futures and options represent two of the most common form of "Derivatives".
 Derivatives are financial instruments that derive their value from an
'underlying'.
 The underlying can be a stock issued by a company, a currency, Gold etc.,
 The derivative instrument can be traded independently of the underlying asset.

 Financial derivatives come in three main varieties:

1. Futures contracts
2. Option contracts
3. Forward contracts
 Futures contracts
 A futures contract is an agreement between two parties – a buyer and a seller
– to buy or sell something at a future date.
 The contact trades on a futures exchange and is subject to a daily settlement
procedure.
 Future contracts evolved out of forward contracts and possess many of the same
characteristics.
 Unlike forward contracts, futures contracts trade on organized exchanges,
called future markets.
 Future contacts also differ from forward contacts in that they are subject to a
daily settlement procedure.
 In the daily settlement, investors who incur losses pay them every day to
investors who make profits.
 Options Contracts
 Options contracts are instruments that give the holder of the instrument the right to
buy or sell the underlying asset at a predetermined price.
 An option can be a 'call' option or a 'put' option.
 A call option gives the buyer, the right to buy the asset at a given price.
 This 'given price' is called 'strike price'.
 It should be noted that while the holder of the call option has a right to demand sale
of asset from the seller, the seller has only the obligation and not the right.
 For e.g: if the buyer wants to buy the asset, the seller has to sell it. He does not have
a right.
 A 'put' option gives the buyer a right to sell the asset at the 'strike price' to the buyer.
 Here the buyer has the right to sell and the seller has the obligation to buy.
 Options Contracts ...

 So in any options contract, the right to exercise the option is vested

with the buyer of the contract.
 The seller of the contract has only the obligation and no right.
 As the seller of the contract bears the obligation, he is paid a price
called as 'premium'.
 Therefore, the price that is paid for buying an option contract is called
as premium.
 Options Contracts ...
 Options are of two types – calls and puts.
 A call option gives the option to buy the underlying asset at a specific price.
 A put option is the option to sell the underlying at a certain price.
 Calls give the buyer the right but not the obligation to buy a given quantity of
the underlying asset, at a given price on or before a given future date.
 Puts give the buyer the right, but not the obligation to sell a given quantity of
the underlying asset at a given price on or before a given date.
 Options Contracts...
 Options on futures provide a further possibility to cover price risk, for
some commodities.
 Options give the right to sell a futures contract or to buy one, at a ―
strike price.
 Thus, options truncate the probability distribution of price at the strike
price and provide protection against adverse price movements (low spot
price for sellers/put holders, high spot price for buyers/call holders).
 2.2.2. Forward Contracting

 A forward contract is an agreement between two parties – a buyer and a seller to

purchase or sell something at a later date at a price agreed upon today.
 Forward contracts, sometimes called forward commitments, are very common in
everyone life.
 Any type of contractual agreement that calls for the future purchase of a good or
service at a price agreed upon today and without the right of cancellation is a
forward contract.
 It is a customized contractual agreement where two private parties agree to trade a
particular asset with each other at an agreed specific price and time in the future.
 Forward contracts are traded privately over-the-counter, not on an exchange.
 Forward Contracts...

 A forward contract is an agreement between parties to buy or sell an asset at a

predetermined price on a future date.
 At the time that a forward contract is negotiated, both parties agree upon the
price, quantity, and date that an asset is to be delivered.
 Since these contracts are private agreements that are not traded on an exchange,
they’re relatively less rigid in their terms and conditions.
 Difference Between Futures and Forwards
The fundamental difference between futures and forwards is that futures are
traded on exchanges and forwards trade over the counter (OTC).
The difference in trading venues gives rise to notable differences in the two
instruments:
 2.3. Financial Risk

 Financial risk refers to the risks associated with how the farm is financed
and,
 It is defined as the additional variability of the farm’s operating cash flow
due to the fixed financial obligations inherent in the use of credit.
 Financial risks resulting from different methods of financing the farm business,
subject to credit availability, interest and exchange rates, etc.
 Some sources of financial risk include:
• Changes in interest rates,
• Credit availability, or
• Changes in credit conditions.
 Financial Risk…
 Financial risk occurs when money is borrowed to finance the farm business.
 This risk can be caused by:
Uncertainty about future interest rates,
A lender’s willingness and ability to continue to provide funds when needed, and
 The ability of the farmer to generate the income necessary for loan repayment.
 Smallholder farmers who borrow money at high interest rates may have particular
difficulty making debt repayments.
 Lower than expected prices, combined with low yields, can make debt repayment
difficult and even lead to the sale of the farm.
 Financial Risk…

 Financial risk results from the method of financing the firm.

 The use of borrowed funds to provide some of the capital for the farm means that
a share of the operating profit must be allocated to meeting the interest charges on
the debt capital before the owners of the equity capital can take their reward.
 In effect, this multiplies the business risk from the equity holders' viewpoint
through an effect.
 Financial Risk…
 In some countries small farmers have become bankrupt as a result of indebtedness.
 Farmers may purchase expensive inputs on credit, but with the failure of rainfall
and consequent low yields may be unable to repay their loans.
 The failure to assess the financial risks associated with lending has a direct impact
on their livelihoods.
 In some cases, farmers have even committed suicide.
 This emphasizes the risk of farming and the need for extension workers and farmers
to be aware of the need for appropriate risk management.
 Financial Risk…

The three aspects that need to be considered in managing financial

risk are listed here.

1) The availability and cost of credit and the repayment schedule.

2) The farmer’s liquidity or ability to generate cash flow.
3) The farmer’s ability to maintain and increase capital.
 2.3.1. Investment Appraisal
 Investment appraisal is referring to the quantitative techniques used to calculate
the financial costs and benefits of an investment decision.
 There are four main methods to investment appraisal:
1. Payback period
2. Accounting rate of return
3. Discounted cash flows
4. Net present value
 1. Payback period

 Payback period is the period of time for an investment project to earn

enough profits to repay the cost of the initial investment.

Pay Back Period = Initial investment($)

contribution per month($)
 Payback period Cont...
 For example, a firm may be considering the purchase of new photocopy
equipment at a cost of $10,000.
 The anticipated financial gain would be $6000 of revenue per year after
maintenance costs are paid for.
 Calculate the payback period.

Pay Back Period = $10000 for purchase

(6000/12 months)

= 20 months
 Payback period Cont...
 Most investment projects would only be considered if they have a relatively short
payback period.
 In reality, it is unlikely the income stream will be constant each year.
 It is still possible though to work out the payback period using the cumulative
cash flow method, as demonstrated here:
Suppose the construction of a new sports complex costs $1,000 000 and is expected
to generate net cash flows over the next four years of:
Net Cash Flow Cumulative cash flow
Year 1 $210 000 $210 000
Year 2 $350 000 560 000
Year 3 $480 000 1 040 000
Year 4 $450 000 1 490 000
 Cont...

 It should be clear this project will not break even in year 1 or year 2.
 Because by year 3, total cash flow does cumulatively exceed $1000 000.
 However, do we have an idea exactly WHEN in year 3 we can expect to break
even?
What is the monthly cash flow in year 3?

Calculate the monthly cash flow : After yr 2  $ 560 000

To break even  $ 440 000
$ 440 000 = 11 months
$40000/ month
 Payback Period example #2

Suppose the addition of a new energy efficient heating system cost $50 000.
What is the payback period?
Net Cash Flow Cumulative cash flow
Year 1 $16 000 $
Year 2 $15 000
Year 3 $14 000
Year 4 $12 000
 Advantages and Disadvantages of payback period

Advantages of Payback Period

Advantages of Payback Period
⁃ Quick and easy to use ⁃ Monthly contributions will vary and
⁃ Used to compare different investments: will not be constant
looking for the quickest payback period ⁃ May cause short-termism: you may
⁃ Useful if your firm has a cash flow problem focus only on short term investments.
⁃ Allows you to see the break-even on the ⁃ This method focuses on time and not on
purchase before it needs to be replaced
profits…which is the major aim of most
businesses.
⁃ Assess the short term, less forecasting errors
⁃ Asses projects that yield quick returns
(profits) for investors.
 2. Accounting Rate of Return

 The accounting rate of return (ARR) calculates the average profit on an

investment project as a percentage of the amount invested.
 Hence, the ARR is also known as the average rate of return.
 The formula for calculating ARR is፡
 Accounting Rate of Return...
 ARR is expressed as a percentage to allow managers to compare the
rates of return on other investment projects.
 As a basic benchmark, the ARR can be compared with the base
interest rate to assess the rewards for the risk involved in an
investment.

 If the ARR of a project is 8% and the interest rate is 5%, then the real
rate of return is 3%.
Suppose the purchase of a new computer system that costs $400 000 is forecast to
generate the following net cash flows over the next 5 years (at which point it must be
replaced)
Net Cash Flow
Year 1 $100 000
Year 2 $200 000
Year 3 $180 000
Year 4 $120 000
Year 5 $100 000
1. What is the total cash flow over the 5 years?
2. What is the profit of the project?
3. What is the average annual profit?
4. What is the ARR?
 Challenge !
 As a worked example, suppose the purchase of a new computer system
cost $ 400000 is forecast to generate the following net cash flows over the
next 5 years (at which point it must be replaced)
Net Cash Flow
Year 1 $ 100 000
Year 2 $ 200 000
Year 3 $ 180 000
Year 4 $ 120 000
Year 5 $ 100 000

What is the total cash flow over the 5 $ 700 000

years?
What is the profit of the $ 300 000
project?
What is the average annual $ 60 000
profit?
What is the 15 %
 Advantages and Disadvantages of ARR

Advantages of ARR Disadvantages of ARR

⁃ Simple calculation that tells you ⁃ Does not take time into consideration.
whether an investment will return more ⁃ It ignores the timing of cash inflows.
or less than a specific benchmark (such ⁃ Does not include time value of money.
as the risk free rate of return ⁃ Prone to forecasting errors.
⁃ Enables easy comparisons of different
investment projects.
 Investment Appraisal Terminology

__________________refers to the judging whether an investment project is

worthwhile through non-numerical means.

__________________refers to the judging whether an investment project is

worthwhile through numerical means. Such as, payback period and ARR.
Qualitative investment appraisal refers to the judging whether an investment
project is worthwhile through non-numerical means.
Factors effecting decision making can be remembered by the mnemonic
PORSCHES:

Prediction Objective
s s
Risk
Profile
State of
Corporate Economy
Image
Human
Relations

Exogenous
Shocks

Short-termism
(352)
Quantitative investment appraisal refers to the judging whether an
investment project is worthwhile through numerical means. Such as,
payback period and ARR.
 2.3.2. Financial Analysis of
Agribusiness
The net worth statement (or the adjusted
balance sheet) is one of the most common
financial statements used in business today.
It provides a “snap shot” view of the
financial health of the business at a given
point in time.
A net worth statement is one which lists all
the assets of a business at fair market
value, records all the liabilities of a
business, and shows the net worth
(owner’s equity) at a specific point in
time.
47
Net worth statement based on historic cost
 Net Worth Statement
Name: Mr. Y Date: April 2021
All values in Dollar
ASSETS LIABILITIES

Current Current

Cash on hand 1750 Operating loan 14000

Seed and Feed Inventory 4425 Account payable 3750

Grain and feed inventory 26325 Accrued interest 3617
Supplies Inventory 36638 Cash advances 18,780
Total 69,138 Total current liabilities 40,147
current asset
Intermediate Intermediate
Breed stock 13875 Breeding stock loans ---
Machinery and equipment 71000 Machinery and 6000
equipment loans
Stock and bonds 30900 Personal loans
Total Intermediate 115,775 Total Intermediate 6,000
assets liabilities
Land 202,680 Building loans 49,574
Buildings 126,761 Land loans 99,706
48
Total Fixed assets 329,441 Total long term 149,280
liabilities
 Analysis of Financial Structure…

Assets = Liabilities + Net Worth

49
 Liquidity
Liquidity measures the farm’s ability to meet its
financial obligations (debts) as they come due without
disrupting normal business operations.
Liquidity is a measure of the relationship between
current assets and current liabilities.
Liquidity may be measured in absolute terms (a
monetary amount) by working capital or in relative
terms (a ratio) by the current ratio or the debt
structure ratio.

50
 Liquidity…
Liquidity is the ability to have cash available when needed
to meet its financial obligations
Measured by two approaches:
Comparing the firm’s assets that are relatively liquid

 Examines the firm’s ability to convert accounts

receivables and inventory into cash in a timely basis

51
 Liquidity..
Working capital
Working capital is simply the monetary difference between
current assets and current liabilities.
It is the amount available to finance upcoming production
after the sale of current farm assets and payment of all
current farm liabilities.
The greater the amount of working capital, the more liquid
the business will be.
Working capital = Current assets — Current liabilities
Working capital = $69,138 - $40,147 = $28,991.

52
 Liquidity..
Working capital needs to be positive for the business to be
liquid. However, there is no hard and fast rule as to the
ideal amount. Acceptable working capital will vary from
farm to farm
Current ratio
The current ratio or liquidity ratio is another method to
determine liquidity. This is a relative measure (a ratio) that
examines the proportional relationship between current
assets and current liabilities.

53
 Current ratio

If the ratio calculated is greater than 1, then the business

is liquid.
A ratio less than 1 indicates that current assets are less
than current liabilities and the business would not be able
to meet its financial obligations from sales of current
assets.

54
 Liquidity..
Liquidity can be also measures a
firm’s ability to convert accounts
receivable and inventory into cash
Average Collection Period

Accounts Receivable Turnover

 Inventory Turnover

55
 Debt structure ratio
The debt structure ratio measures the proportional
relationship between current liabilities and total liabilities.

A Debt structure ratio of 0.21 would indicate that 21% of

total business debts are in the current position (that is, are
current liabilities). A high debt structure ratio is desirable if
the business has positive working capital (a current ratio
greater than 1).

56
 2. Solvency
Solvency refers to the ability of the business to
meet its total debt obligations determined by
comparing the amount of borrowed capital used to
the amount of owner’s equity invested in the
business.
It is a measure of the risk bearing ability of the farm
to carry on business after financial adversity.
An acceptable solvency position depends upon the
size of the farm and the enterprises associated with
it and also upon the management ability of the
farmer.
Minimizing risk reduces the potential for a claim on
net worth from an unfavourable event. Income
57
variability and the risk associated with production
 Solvency…
Solvency may be measured in three ways - absolutely (a
monetary amount) by net worth, relatively (a ratio) by the
debt ratio and the leverage ratio.
Net worth: it compares owner’s equity (net worth) to
borrowed capital (liabilities).
If net worth is positive (total assets greater than total
liabilities), the business is solvent.
If net worth is negative (total assets are less than total
liabilities) then the business is insolvent or bankrupt.

58
 Solvency…
Debt ratio: sometimes called the solvency ratio or debt to
asset ratio) examines the proportional relationship
between total liabilities and total assets.

If the debt ratio is less than 1, the business is solvent or

insolvent? Why?

59
 Solvency…
A debt ratio of 0.38 indicates that 38% of the business
assets are debt financed.
Since the debt ratio is a relative measure of solvency, it
can be used for comparisons between farms.
Ratios of up to 0.40 to 0.50 are generally considered safe
in the farming industry.

60
 Solvency…
 Leverage ratio: The leverage ratio (or debt to
equity ratio) measures exposure to financial risk
by examining the extent to which creditors have
financed the business (by liabilities) as compared
to the owners (by net worth or equity).

 A ratio greater than 1 indicates that creditors are

financing a higher proportion of the assets than is
the owner.
 If the ratio is less than 1, the owner is financing
the majority of the assets. This leverage ratio
61 indicates that the creditors of the farm are
financing 61 cents of farm assets for every $1.00
 2.4. Human risk
 Human risk refers to the risks to the farm business caused by illness or death and
the personal situation of the farm family.
 Human or personal risk includes illness, accidents, migration and political and
social unrest.
 Accidents, illness and death can disrupt farm performance.
 In many countries labour migration away from rural areas is a common occurrence.
 Personal risks are specific to an individual and relate to problems with human
health or personal relationships that affect the farm or farm household.
 Some sources of personal risk include:
• injuries from farm machinery,
• the death or illness of family members from diseases,
• negative human health effects from pesticide use, and
• disease transmission between livestock and humans.
62
 Human risk...
 Farmers are also subject to the human or personal
risks that are common to all business operators.
 Disruptive changes may result from such events as
death, divorce, injury, or the poor health of a
principal in the firm.
 In addition, the changing objectives of individuals
involved in the farming enterprise may have
significant effects on the long run performance of the
operation.
 Asset risk is also common to all businesses and
involves theft, fire, or other loss or damage to
equipment, buildings, and livestock.
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 A type of risk that appears to be of growing
 2.4.1. Business structure

2.4.2. Transition planning

Reading Assignment!!

64
 2.5. Institutional risk
 Institutional risk refers to unpredictable changes in the provision of
services from institutions that support farming.
 Institutional risk occurs because of unpredictable changes in the provision
of services.
 Such institutions can be both formal and informal and
 include banks, cooperatives, marketing organizations, input dealers and
government extension services.
 Part of institutional risk is the uncertainty of government policy affecting
farming, such as price support and subsidies.
 The risks farmers face are often a result of decisions taken by policy-
makers and managers.

65
 Institutional risk...
Institutional risk results from changes in policies and regulations that
affect agriculture.
This type of risk is generally manifested as unanticipated production
constraints or price changes for inputs or for output.
For example, changes in government rules regarding the use of
pesticides (for crops) or drugs (for livestock) may alter the cost of
production or a foreign country’s decision to limit imports of a certain
crop may reduce that crop’s price.
Other institutional risks may arise from changes in policies affecting the
disposal of animal manure, restrictions in conservation practices or land
use, or changes in income tax policy or credit policy.

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  Production, marketing, Interrelation of risks and human risks exist
financial, institutional
on most farms.
 They are frequently interrelated.
 The ability to repay debts depends on levels of production and the
prices received for produce sold.
 Financing of production depends on the ability to borrow capital and
the ability of the lender to supply capital in time.
 The different types of risk often need to be considered together.

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 2.6 Analytical Framework in risk
analysis
 The Risk Analysis Framework is a key document for
informing applicants, stakeholders and the public about
the Regulator’s approach to applying risk analysis.
 It describes the principles of risk analysis used by the
Regulator to protect human health and safety, and the
environment, in accordance with the Act.
It explains why and how the Regulator undertakes risk
analysis by:
• describing the context for risk analysis.
• describing the Regulator’s approach to risk analysis,
based on national and international standards and
guidance.
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• outlining the methodology, the Regulator uses when
 Purpose of the Risk Analysis Framework
 The purpose of this Risk Analysis Framework is to:
• provide a guide to the rationale and approach to
risk analysis used by the Regulator
• enable a consistent and rigorous risk analysis
approach to evaluating license applications
• ensure that the use of risk analysis in the
decision-making process is transparent to
applicants and other stakeholders.

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 Components of risk analysis
 Risk analysis is used to encompass all components of
risk; namely,
• Risk assessment,
• Risk management and
• Risk communication
Risk analysis = Risk assessment + Risk management + Risk co

Risk context
 is defined as the ‘parameters within which risk is assessed,
managed and communicated’.
 It establishes the scope and boundaries, terms of reference
against which the significance of risk will be evaluated, as well
as the structure and processes for the analysis.
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 Components...
Risk assessment
 is defined as the ‘overall process of risk identification and
risk characterization’.
 It identifies risks from plausible sets of circumstances that may
result in harm to people or to the environment and estimating
the level of risk on the basis of the seriousness and chance of
harm.
Risk management
 is defined as the ‘mechanisms to control and mitigate risk’.
 It evaluates, selects and implements plans or actions to
ensure risks are appropriately managed.
 It includes preparation of a risk management plan, which
includes measures to reduce the level of certain risks identified
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in the risk assessment; and monitoring and reviewing, which
considers the effectiveness of outcomes from each step in the
 Components of risk analysis...

Risk communication
 is defined as the ‘culture, processes and structures to
communicate and consult with stakeholders about risks’.
 Risk communication is the exchange of information,
ideas and views between the Regulator and
stakeholders;
 It also conveys the rationale for decisions made by the
Regulator.

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 Deadline March 15, 2023
Assignment 1
1. Review the legal forms of business organizations with
the support of literature (10 pts)
 Include the factors that should be considered when choosing
a legal form.
 The advantages and disadvantages of each legal form.

Assignment 2
2. Develop a hypothetical farm financial statement
including its financial structure and profitability analysis
(10 pts)
Note: Submit both assignments through hardcopy.

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