AgriBusiness “Farming fertile minds …… Growing fertile futures” Risk Management

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

2. Contents • Market principles within S A Agriculture. • Agricultural finance at a glance. • Funding requirements for a farming venture. • Risk and uncertainty • Information, Information- a perfect world (?) • Risk types and consequences • Risk Mitigation • Management Process • Conclusion

3. SA Agricultural's Exposure to the International Market 45,000 80% 40,000 70% 35,000 60% 30,000 50% 25,000 (R '000) 40% 20,000 30% 15,000 20% 10,000 10% 5,000 0 0% 1980 1985 1990 1995 2000 2005 Exports Imports Import + Exports as % of GPV 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 Gross Farm Income Production finance Based on insurance and cashflow Net loss Net margin Annual production cost Value (R) Overheads and living costs Based on surplus security And surplus cash capital payments Long-term loans based on security and surplus capital Interest payments J1 J2 J3 J4 J5 etc. UNCERTAINTY

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

8. Perfect World (?) with information Utilize and build Info Intelligence and use it as decision base !!!!!!! Nice hair All info 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 08 Aug 08 Sep 08 Nov 08 Dec 08 Okt 08 Yields

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

12. Market Industry Indicators as example Are there things causing discomfort or keeping you awake at night? • 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. Risk drivers

13. Summary of Risks and Consequences Risk mitigation

14. Risk Mitigation Risk management process

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

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.