Volatility is likely to remain a key feature in arable farming this year, and producers must take steps to reduce their exposure to risk, according to rural consultant Savills.
"Volatility in both grain prices and input costs is here to stay, and it needs to be managed," says Justin Lascelles, associate director at Savills’ Exeter office. "If you can sit down and write firm figures into your budget, you are more able to plan solidly for the coming months and years. You can be more confident about forecast profit levels, and better able to tender for rents or other projects."
Grain markets used to move by only a few pounds in a week, but this season they have dropped or regained more than £10 in just one session. "There is so much city money involved in agricultural commodities now; and the global market is more important than it used to be. Suddenly there are a lot more factors coming into play, which are completely out of our hands, and cause extreme volatility."
One of the simplest ways to remove risk in the market is to sell grain forward at a set price. "With grain prices where they are today most producers should be able to lock into a reasonable profit for both 2011 and 2012 crops." Alternatively, farmers can commit grain to a pool or tracker, operated by merchants with perhaps greater expertise in daily grain trading.
Another alternative is to take out an option through a grain merchant, locking into a minimum price while still being able to benefit from any rise in the market. However, this has become increasingly expensive due to market fluctuations, costing £20/t or more, says Mr Lascelles.
Farmers’ second key source of income, the single payment, is also open to volatility, being converted from Euros to Pounds on 30 September each year. "Since 2005, the Euro has strengthened, boosting the single payment by about a quarter. But rather than accepting the rate on 30 September, farmers can choose other times in the year to set their exchange rate using a banking option." At a commission of about 1%, producers can either lock into current exchange rates, or choose a minimum price option to fix a base in their single payment.
But it is not all about guarding against income volatility – producers should also consider ways to mitigate risks affecting input costs, he adds. "Two of the greatest expenses on a farm – fertiliser and fuel – have soared in value in recent years."
Fuel is the easiest to hedge against, having a transparent futures market. Farmers can stock up at today’s prices, securing as much as they can physically store. Alternatively, some banks offer contracts with suppliers at guaranteed prices for up to three years ahead. "Most require a minimum quantity of 600,000 litres a year, so farmers may need to collaborate," says Mr Lascelles.
Fertiliser markets are more difficult to manage, often tracking grain prices as well as supply and demand. Producers could buy forward in bulk, providing they have sufficient storage. "There are also a few forward contracts available, which are usually only for large quantities, up to a year ahead, so farmers will need to get together and improve their negotiating power.
"The idea of any risk management is to pin down costs of production and margins to a level you are happy with. Be realistic, not greedy – as the saying goes: Turnover is vanity, profit is sanity, but cash is king."
