How Can Volatility be Managed on the Farm?

ANALYSIS - One of the biggest threats and challenges to farmers today is the volatility of the market.
calendar icon 3 November 2015
clock icon 5 minute read

Managing the ups and downs of the market, constantly changing prices and costs and the competition from producers around the world on domestic markets are testing farmers daily.

Managing Volatility as the New Norm is the theme of this year’s National Farm Management Conference in London.

The conference, organised by the Institute of Agricultural Management, will focus on the challenges a volatile market presents looking at aspects from across the farming spectrum as well as taking views from those advising the industry and the end customer.

Joint conference chairman, IAgrM chairman, John Giles said that the UK and world agriculture and agri-food sectors are currently experiencing a period of volatility in terms of world commodity prices, climate, consumer behaviour, currencies, economic growth patterns and input prices.

“Our conference has been designed to reflect this situation, which as we have said in the title, might well become the new norm, at least in the next few years,” he said.

“We have identified what we believe to be a group of speakers from across the supply chain from a range of sectors to address us. These are all people and organisations at the top of their game.

“I am a strong believer in the principle of ‘transferable lessons’ from other sectors. I am sure the day will be of huge benefit to all our delegates, as we grapple with the challenges and opportunities that UK agriculture has to contend with.”

The conference will start with a presentation from the chief executive of the Agricultural and Horticultural Development Board, former National Farmers’ Union president Peter Kendall.

He said that with British food and drink exports reaching £19 billion and rising, the long term future for UK farmers and growers is encouraging despite the upheaval of farmgate prices in recent months.

“Maximising the opportunities this offers us as farmers and growers lies in encouraging a mind-set, which looks to continually learn and adapt, one which is open to building new skills, innovating and adopting new technologies,” Mr Kendall said.

“Beyond the farmgate, we need a culture of joined-up thinking and collaboration across the supply chain, a culture which is backed up by strong centres of excellence in food and farming and a focus on applied research which delivers a tangible difference to agricultural businesses.”

Jimmy McLean, the agriculture chairman of RBS said that managing risk is key to managing volatility on the farm and he said risk is divided into three broad categories.

  • Loss control
  • Risk Transfer
  • Risk Retention

“The objective is not to eliminate risk - but to manage that risk in balance with the return or cost to the business,” said Mr McLean.

“The sources of risk are well known. Yields can be affected by weather, pests or diseases. Price movements can be triggered by sudden changes in supply or demand, or by exchange rates. These can have knock-on effects on input costs. Although they may be categorised as production risks, they ultimately create financial risk within businesses.”

He added: “Many farmers already practice a degree of risk management, although they may not describe it in these words. In a world where costs and prices tend to be volatile, and where the cushion of price support has been reduced, risk management will become a more important part of business planning.”

In the conference, Connor McVeigh, the UK supply chain director at the fast food chain McDonald’s will look at the partnership approach between he supplier and the customer to managing volatility.

“I will explain how the relationships fostered over many years have enabled the business to meet its growing demand for quality ingredients,” he said.

“I will also talk about how McDonald’s treats its suppliers, very intentionally as partners and how both parties willingness to collaborate, innovate and invest together has steered forward success for both sides and created the strong and robust supply chain the UK business requires to meet its future demand.”

Andy Thompson, the Europe, Middle East and Africa regional director at Genus said that the current extremes of market volatility from both an output and input perspective are creating the ‘perfect storm’ for those customers aligned to non-differentiated milk contracts.

His presentation to the conference is to discuss how different segments of the dairy producer market need to adapt and change from a marketing stand point, while aligning their own production systems to this.

“Not only will traditional forms of benchmarking need to be used, but the integration of behaviour, leadership, strategic planning and effective partnerships will all need to be considered,” he said.

“Scale, geography, breeding and local resources will all play their part in the future success of dairying in the UK.

“My presentation will also touch briefly on what this means for those in the supply industry and how this needs to change to give customers choice and value in the future.”

Joint conference chairman, David Alvis managing director of Yorkshire Goats said that in the dairy sector a one per cent oversupply can result in a 50 per cent drop in the market price.

“Market volatility is the new normal and it is not going to go away anytime soon. It cannot be managed per se, but our exposure and resilience to its inherent risks can be” he said.

Mr Alvis added that it can be managed through competitiveness, consistency and cooperation.

He said that cost of production remains the most effective hedge against volatility but assured quality standards can often be the key differentiating factor in determining choice in an oversupplied market.

He added that cooperation and strength in numbers also played an important role as this helped to achieve the critical mass to add value to production while at the same time keeping flexibility and the capacity to take advantage of market opportunities.

Thia Hennessy, the principal research officer at the Rural Economy Research Centre in Ireland, will be looking at the approach taken in Ireland to managing volatility in the grain and dairy sectors.

Dr Hennessy said: “Farming has always been a risky business with farmers being at the mercy of markets, the weather and animal disease.

“However in recent years it has become a far more risky business.”

At the conference, Dr Hennessy will look at contributing factors to market volatility including extreme weather events and she will examine how the farming community has coped with these risks.

She will also examine how the US farming sector has approached volatility and describe the impact of volatile markets produced by extreme weather conditions on Irish agriculture.

The National Farm Management Conference takes place in London on 26 November.

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