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 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.
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.
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 (https://www.zambianobserver.com/choma-farmer-loses-over-k250-000-in-investment-after-his-over-250-goats-are-stolen/). 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.
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.
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.
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, tembusha, 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.
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.
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.
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.
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:
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.
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.
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).
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.
(The author is a Senior Lecturer of Livestock/Animal Health Economics at the University of Zambia, School of Veterinary Medicine. Email: [email protected], Mobile: +260977717258)