Volatility – how can farm businesses manage it?

AHDB’s cross-sector forum wants to identify how to help farming businesses cope with volatility. Suzie Horne reports from its recent launch.

Graham Redman, partner, the Andersons Centre – on why volatility matters

Volatility is unpredictable price change from one day to the next – and it will increase over the next five years. Nobody can control the [commodity] markets but their impacts can be managed.

Price volatility looks big on a chart but measured as a percentage of the average price, the variation is often not as much as might be expected.

For example, in 2015, grain price volatility was 18% – the problem was the low price (and average £120/t on the London November futures market), but at much higher prices in 2010 for example, the volatility was 39%.

It’s not just about price volatility in the marketplace – it’s the impact on profit and loss. In just four years the volatility of margin from arable production on Andersons’ model holding – Loam Farm – has varied from a surplus of £76/ha to the £107/ha loss predicted in the 2016 budget.

See also: How three farmers from Australia and New Zealand ride out volatile prices

Anderson’s Friesian Farm is an average-sized dairy farm on a liquid milk contract with no supermarket alignment – here profitability ranges from almost 7p/litre to a loss of 0.5p/litre.

Subsidy reduces the impact of volatility – take it away and the volatility increases. So by 2020 subsidy could be 30% lower because of exchange rate but also less will be allocated through direct payments?

Allan Wilkinson – on managing farm businesses in the face of volatility

Some businesses cope with, manage and have excelled and thrived in the face of volatility. How do they do it? Businesses need to be less reactionary and more strategic – it’s not about being the biggest, it’s about being the smartest and best in class.

In a volatile market, it’s not the biggest but the fastest, most resilient businesses that will survive.

Benchmarking has to be everyday, common language but unfortunately in agriculture is still not an accepted part of understanding where your business is.

Farmers often think if they are slightly better than average and get a slightly better price for a slightly lower cost, that will put them in a good position. However, really successful individuals think differently about their market. They manage everything more carefully, they have proper close professional integrated supply chain management – top to toe.

More integrated sectors manage volatility better – for example, the broiler meat sector. Those that manage volatility the most aren’t aggressive, they are very focused and work on their weaknesses.

In the two biggest sectors – milk and cereals – the difference between best and worst has never been greater. It’s about difference, not about price, and the differences are all about management capability, not about the system, size of the business or colour of the tractors.

There are people on low milk prices still putting money on deposit and others on high milk prices with supermarket contracts and losing money. 

Jack Watts, lead analyst, AHDB – on the volatility forum

The work of the volatility forum must be industry-led, not AHDB imposed. It will have a long-term focus on the development of sustainable volatility management tools.

When prices rise, there is a tendency for doing something about volatility to fall off the agenda. This is a longer term approach and there is not one solution for each sector; we need to be very open-minded about tools and mechanisms.

The big challenge is to move beyond superficial debate and discover what is achievable.

The forum needs to discover what appetite there is in different sectors for different mechanisms and tools to help manage volatility, to promote the development of these and help policymakers come up with something more tangible.

Ways of managing volatility were likely to be a mixture of:

• Developing forward contracts
• Closer integration and co-operation – along the chain as well as between farm businesses
• Formula prices  
• Government policy
• Futures, options and other derivatives
• Farm business strategy

AHDB wants farmers and others to get involved in the work of the forum.

A steering group will prioritise the work of the forum. If you want to get involved, contact Jack Watts at AHDB by Friday 12 February – jack.watts@ahdb.co.uk – 0247 647 8760