Livestock farming
is an investment which most of us venture in because we have seen and heard how
successful other farmers are doing. I have seen and heard of many prospective
farmers who have obtained loans to start livestock enterprises but have ended
up defaulting on loan payments because it turned out not to be what they
expected.
All businesses
look excellent on paper, and numbers are very attractive for people to invest.
However, this does not mean that things are all rosy in livestock farming
business. Like any business, livestock farming has risks, which must be
considered when conducting an investment appraisal of respective livestock
enterprises. Testimonies from livestock farmers, especially on social media
platforms, mostly show the good side of livestock farming and rarely mention
the risks, challenges or difficulties involved. Livestock farming is a
business, and it must be treated likewise with proper planning, cash flow
projections, risk assessment and mitigation. Business gurus tell us that due
diligence is essential before you embark on any business. How do we conduct due
diligence without knowing the risks involved in the industry?
Yes, like any
other business, the livestock enterprise also requires that you do a full risk
assessment, which should clearly show the potential risks and how they may be
mitigated. In this article, we will discuss the essential risks that affect
small-scale farmers and upcoming cooperatives.
You may ask, what
is a risk? Well, a risk is a condition in which there is a possibility of an
adverse deviation from the desired outcome, expectation or a result hoped for.
There are two types of risks, namely pure risk and speculative risk.
- A pure risk is a risk that only involves two
likelihoods, i.e. the chance of loss or that of no loss.
- A speculative risk is a risk that has three
possible outcomes, i.e. possibility of loss, the possibility of no loss
and possibility of a gain.
Both these
types of risks are present in a livestock farming enterprise, but only a
speculative risk will be the focus of this article. Why should risks in
livestock enterprises matter? Well, it is because risks may lead to losses,
reducing the incentive for investment and subsequently reducing the growth of
the livestock subsector. Let us start by highlighting some of the critical
business risks and end with possible risk management options that exist in the
livestock subsector.
1. Disease risk
Diseases that
affect livestock are a significant risk in livestock farming. We have seen
farmers who have obtained huge loans to buy day-old layer chicks (pullets), but
Newcastle
Disease (NCD) ended up killing half the number of their chickens
at the age as early as two weeks. This is a significant loss, especially with
borrowed money because it means all the cash flows you projected won’t be
realised. Worse still, most farmers rarely insure against losses in livestock
farming despite some insurance packages being affordable and readily available.
Another disease
case scenario is where you obtain a loan to start a piggery business.
Unfortunately, African
swine fever breaks out; in this scenario, you not only lose many
pigs to the disease, but the Government comes in with diseases control
measures, and depopulate all pig farms in the affected areas, resulting in you
losing everything. How do you repay the loan or the capital?
Another case
scenario is where you get a loan to start a dairy farm and boom! You have an
outbreak of Foot and Mouth Disease (FMD) in an area. This is an extreme blow to
a start-up cooperative or farmer especially that during the FMD outbreak, you
are not supposed to sell milk because the virus can be transmitted through
livestock and livestock products. Remember the recent FMD outbreak in Chisamba?
Milk could not leave the District for fear of spreading the disease? The impact
of such an outbreak in this scenario will be severe to the livestock farmer,
especially small scale.
The scenario
would not be different for a beef farmer, who depends on selling his or her
beef cattle to Lusaka and the Copperbelt provinces, if FMD breaks out in the
area, and a livestock movement ban is instituted, the loss in trade due to the
movement ban would be simply counteractive. We have seen and heard of farmers
engaging in illegal movement because they cannot survive the loss to the
business. I remember cases where traders were using canoes on the Kafue River
to move pigs illegally and drench them with a local brew (kachasu) so that they
are drunk and not make noise during transportation. The losses in trade due to
the risk of disease can cause farmers’ survival to be threatened to the point
that they result in irrational activities.
2. Stock theft risk
Livestock theft
is a significant risk in livestock farming. I remember a case some years back
in Luanshya, where a group of farmers obtained a loan to buy dairy cows at
about K12, 000 each. A few months later, some of the dairy animals were stolen
and slaughtered for meat by the thieves. Imagine the loss. You may also recall
the spat of pig poisoning in Lusaka by thieves and selling the carcases for
meat. Thieves would enter farms, poison the pigs killing almost the entire herd
and load them on vehicles, moving the carcases to a sale point. A recent case
is the theft of 250
goats in Southern Province. Stock theft is a serious problem and
must not be ignored. When starting a livestock farming business, just like you
mitigate loses due to theft in other businesses, you should consider ways of
reducing stock theft from your enterprise.
3. Drought and flood risk
Livestock
farming enterprise is affected by drought. A case in point is this year where
feed prices have doubled due to poor harvest that led to low supply of maize.
Such unplanned fluctuations in feed prices affect the cash flow projections,
which in turn also affect loan repayment. Seasonal variations bring about
high-temperature conditions that reduce egg and milk production. High
temperatures can cause death in pigs. It is important to realise that floods
can equally cause devastating effects to the livestock enterprise.
4. Risks due to the unstable economy
Unstable
interest rates, foreign exchange and inflation, is a risk to livestock farming
enterprise. For instance, in the recent past, people have borrowed at interest
rates of about 23% and ended up paying at 45%, which is more than 100%
(kaloba). This affects the growth of livestock enterprises, and farmers must be
aware of this risk.
5. Risk of free information
Internet is a
great invention that gives us access to information, but it is also a
significant risk to farmers who are depending on it at the expense of
professional advice. If you take a moment to see the kind of guidance on farmer
groups on social media platforms, such as Facebook and WhatsApp; the answers
and advice given could well be more harmful than the initial problem or
concern. There are many times that a question is posed, and answers given
include, use paraffin to kill fleas, use holy water, anointing oil, detergent
paste, aloe
vera, moringa,
ashes etc. to treat and prevent against Newcastle disease in chickens. Dear
farmers, a lot of people are caught up in this miss-information and are losing
their hard-earned investments through such practices. Would you certainly
invest K100, 000 at the farm only to depend on information from the Internet?
The answer should be NO. I recommend that all farmers seek professional advice
to avoid losses in their respective livestock farming enterprises.
6. Market interruption risk
This involves
loss of profit margins due to non-acceptance of livestock products during food
safety scares. Food safety scares like formalin in livestock products, foreign
bodies, and diseases transmissible between humans and livestock may affect
profit margins in the livestock business.
7. Risk of price fluctuation
Livestock
farmers have no control over the prices of their animals and animal products
(like what happens to tomato). The inability of the farmer to determine selling
price based on production costs is one of the most significant farming business
risks. This risk must not be ignored. The small-scale farmer must learn new
methods, such as contract farming, as a price risk mitigation measure; just
like organised livestock farmers use it.
8. Risk of default
Some farmers
sell their livestock and livestock products on credit, and suffer a high rate
of defaulting on payments. Many times, prospective customers get chickens worth
a significant sum of money and only pay in part, or never pay at all. The
farmer then has to chase after their retain on investment on multiple phone
calls and several futile drives to their places; ending up spending double or
more on chase, compared to the amount due. This is quite a considerable loss.
9. Risk of delayed payments in contract
markets
There are those
farmers who supply supermarkets and other stores on a contract basis, but once
the products are delivered or sold, payment is often delayed, making it
difficult for start-ups to keep in production, especially if money from sells
is depended on for capital re-injection. Farmers have ended up borrowing to
keep up with production and avoid defaulting on contracts signed. Since farmers
are not protected, it seems okay for the supermarket to delay payment, but not
okay for the farmer to delay supply. Delayed payments may result in failure by
farmers to pay workers and buy feed, medicines, vaccines as well as other vital
inputs; which halts a constant cash flow.
How then can you manage the risks
mentioned above?
Like any other
business, there are four ways of mitigating the risk in livestock farming. All
of these are focused on implementing risk management measures in a scientific
approach, by anticipating possible losses and designing as well as implementing
procedures that minimise the occurrence of the loss or the financial impact of
the damages that do occur. The Four ways of mitigating risk are:
1. Risk avoidance
This involves
altogether avoiding the risk by not venturing into livestock farming. However,
this is not what we would desire because we want to see more Zambians engaging
in livestock farming as a business. The most important thing is understanding
the industry, the risk involved and methods of minimising the risk.
2. Risk reduction
This involves
reducing the impact of the loss should it occur. It includes activities that
reduce the likelihood of a loss or the magnitude of the loss. In livestock
farming, this is achieved through establishing and following Good Management
Practices (GMPs) such as feeding, deworming, dipping, vaccinating etc. and
training workers on implementation of best practices (Koontz et al., 2006). It
may also include investment in improved production, sanitation or safety
technologies. Risk mitigation comes with costs in livestock farming
enterprises. With our developing livestock subsector, this is the option I
would recommend to the Zambian farmers because it is sustainable and currently
being done, though to a lesser extent, among small-scale farmers.
3. Risk acceptance
This is also
called risk retention or self-insurance because you accept the risk as a normal
part of a business within the livestock enterprise. This may involve deducting
an amount from monthly profits and set them aside for risk-mitigation. The
reasons for retaining risks could be due to a high cost of alternative risk
mitigation measures or because the risk is very remote or the quantum is small
enough to be acceptable to the enterprise. An example would be a case of
non-availability of commercial livestock insurance mostly for production
animals (Koontz et al., 2006).
4. Risk transfer
Risks in
livestock enterprise can also be managed through markets that for a fee will
transfer from those who are less willing to accept it to those who are eager to
take it through hedging and insurance. Insurance is the most common
market-based risk management instrument. Currently, insurance companies have
livestock insurance packages for selected types of livestock, but very few
livestock farmers subscribe, which makes it challenging to reduce premiums. The
insurance option is practically ideal for a well-organised or developed
livestock subsector. It works on the principle of pooling large numbers of
highly uncorrelated risks to reduce the variance. By risk pooling, much
less-perfectly correlated risk insurers reduce society’s exposure to the risk
being insured. In simple terms, if many farmers are organised exceptionally in
cooperatives and subscribe to insurance, the premium paid per year will reduce.
The local insurance industry provides several insurance solutions but is not
widely used by local farmers.
The choice of
which risk management option to take will depend on the level of investment and
how organised your livestock farming enterprise is. If you borrow money from
the bank, you need a well-thought-out livestock risk management plan to avoid
defaulting. Those interested should read more on risk management and consult
experts in insurance. Wishing you the best in managing the risks in your
livestock enterprises.
About the author:
Chisoni Mumba, PhD - is a Senior Lecturer of
Livestock/Animal Health Economics at the University
of Zambia, School of Veterinary Medicine. E-mail: cmumba@unza.zm,
Mobile: +260-977-717258
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