Australian Agriculture: An Increasingly Risky Business

Summary

​Risk is ever-present in Australian agriculture. It is not a new issue for farm businesses and has in fact often been the driver for new ideas, innovation and change. However, the nature of these risks is constantly changing, and so the need to understand the tools available to address and manage these risks, and to ensure that the risk management marketplace matches the needs of farm businesses, is greater than ever. 

The most practical and effective way to address multiple known risks simultaneously (as well as protect against new, emerging and unknown risks) is through farm business management which strengthens financial resilience and delivers the ability to absorb production, market and institutional shocks. The fact that the Australian farm sector has continued to grow - while exposed to significant risk, and in the absence of both Government support comparable to other nations and a mature income insurance market - is an indicator that good farm business practice has been effective in driving a strong and resilient farm sector economy.

However, for commodity subsectors and on an individual farm business basis there are multiple defined risks specific to industry or location for which more tailored risk mitigation tools can form an important part of the farm business management toolbox. Insurance and weather derivative products, for example, can provide effective and cost-efficient methods for practically eliminating risk for certain events. In many cases though, where these products are available, they remain underutilised or in market failure.

Improved financial literacy and understanding how insurance and derivative products work would raise awareness for farm businesses of the potential utilisation of these products. However, even with better understanding of the functional specifics of risk mitigation products there is a further need to understand how risk appetite interacts with decisions of cost/benefit before forecasts of likely uptake can be made. Risk appetite is individual, cultural and differs between subsectors and regions. Industry advocacy and Good farm business practice has been effective in driving a strong and resilient farm sector economy. There is a further need to understand how risk appetite interacts with decisions of cost/benefit before forecasts of likely uptake can be made. Risk management in Australian agriculture 4 other promotion of risk management products needs to take these cultural factors into account when communicating the potential benefits.

The threat of new and emerging institutional risk factors is quickly becoming a major concern for industry. Institutional risk will play a significant role in the future viability of the sector. Institutional risks associated with competition and supply chain dynamics may be accelerating but are nonetheless familiar to most agricultural supply chain actors. New and emerging institutional factors (e.g. community trust issues such as animal welfare and potential glyphosate regulation) have created the greatest uncertainty and increased risk for producers - and indeed the entire agricultural value chain - in recent times. These risks are unlikely to diminish, as they are the product of an increasingly active and engaged consumer base. 

An appropriate industry response to institutional risk is complex and perhaps one of the more difficult tasks for industry going forward. There is no easy or quick fix as there is unlikely to be an institutional risk mitigation ‘product’ developed. Building financial resilience via farm business practice is the most effective way to mitigate institutional risk, as this resilience provides time to recover from unanticipated shocks. However, unlike production and market risks, some institutional risk factors can potentially be avoided altogether through industry action to avert the hazard before it becomes a risk.