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How can we tackle volatility? AHDB launches new project to find the answers

What can the UK food and farming industry do to address the enormous challenge of managing market volatility? AHDB has brought people together from across the industry to address this question.
UK wheat prices have halved since late-2012
UK wheat prices have halved since late-2012

The Agriculture and Horticulture Development Board (AHDB) is bringing people together from across agriculture to help the sector address one of the biggest issues facing all sectors of agriculture – volatility.

 

The project will look at can done at farm level to increase resilience through to financial tools like futures, pricing formulas and contracts, supply co-operation and Government policy.

 

Possible solutions were discussed by farmers, processors, retailers, trade associations and bankers at the launch of AHDB’s Volatility Forum in Central London on Wednesday.

 

The Andersons Centre’s Graham Redman kicked off the event by stressing volatility was a ‘central pillar of free market economics’ and ensured surpluses and shortages were corrected. “But it presents challenge to the industry and businesses as well,” he said.

 

Commodity markets are particularly susceptible to volatility, with businesses operating on fine margins and high turnover most exposed to price variation.

 

He displayed some striking graphs to illustrate just how big an issue it had become, charting the ups and downs of wheat prices, currently at half the levels reached in 2012, and milk prices, currently 40-50 per cent lower than their 2013 peak.

 


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But he said low prices, not volatility, were the cause of farming’s current problems.

Exposed

HSBC’s head of agriculture Allan Wilkinson said agriculture was ‘more exposed to volatility than anything else I have seen’ but said, with the notable exception of the broiler industry, was not doing enough to combat it.

 

Noting the continuing high volumes of milk being produced as individuals seek to keep unit costs down, he called for ‘proper integrated supply chain management’, involving close interaction and exchange of market knowledge between producer and supplier.

 

“The whole supply chain has to work more closely together,” he said.

 

Mr Wilkinson highlighted the enormous gap between the most and least efficient producers, as illustrated in a recent AHDB report on the dairy industry showing a 40ppl difference in costs between the two extremes – who were receiving the same price.

 

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It was a similar story among arable farmers, with costs of production varying by as much as £100/tonne between the best and the worst, he said.

 

He urged farmers to pay more attention to their own efficiencies and costs, including constantly benchmark what they are doing against others.

 

Those with the lowest cost base would always be the best position to weather the ups and downs of the market, he said.

 

“It is not about being the biggest, is about being the most adaptable, the smartest and the best in class. Average is not acceptable,” he said.

 

How can we address volatility? 

How can we address volatility? 

AHDB’s lead analyst Jack Watts outlined the six key areas the Volatility Forum would explore:

 

Forward contracts – not to be confused with ‘futures’ these can deliver transparency around volume and pricing. What is the appetite for these within the supply chain?

 

Formula pricing – already in place in some sectors, what will the next generation formula pricing could look like?

 

Derivatives (futures) – a complex area that comes with health warnings. What knowledge and skills are needed by businesses to trade futures and what products might be of use?

 

Co-operation and integration – why does the UK supply chain co-operates less than in other countries and what lessons can be learned from the pig and poultry sectors?

 

Farm business level – what can farms do better to manage risk, including access to key information, for example on commodity markets and developing risk registers?

 

Government help – how could Government policy help, for example, on the next CAP reform?

 

A steering group will now be formed to explore these issues in depth, looking at how ideas and tools could be developed and implemented across the industry.

 

Mr Watts acknowledged one of the biggest challenges would be communicating the findings to farmers.

 

“Knowledge and communications are a massive part of this project. That is why we are looking for key members of this industry to carry this through,” he said.

 

“We need to take the industry with us. There are already a lot of farmers out there who are taking a very corporate approach to managing risk and we want to able to spread that corporate culture of managing risk across agriculture.”

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