Adapting to Volatility
Market volatility has been one of the greatest fears for farming over the generations. It has been made even more prominent over the last year with all agricultural commodity prices dropping significantly. For example, barley is hitting prices similar to that of 10-15 years ago, and struggling to make more than £100/t, and beef dropping from the highs of 2013 at an average of 395.4p/kg/dwt for R4L steers, to the current average of 348.7p/kg/dwt (August 2014). This coupled with the ever increasing cost of inputs, mainly driven by oil prices, makes budgeting a daunting challenge, especially if you are selling on the open market. Often farms rely heavily on subsidy payments for any profit margin.
For the first time since pre 1993 a lower subsidy payment will be received, from 2015, in the form of the new Basic Payment Scheme. It is time to start analysing farm productivity and efficiency. A more proactive approach needs to be taken. Times are changing where it will become survival of the fittest and the emphasis needs to shift more towards business performance and less reliance on subsidy.
Volatility will always be around, so learning not to fear it but to anticipate and adapt to market variations will be key. The difference between the best and worst margins is ever increasing and there needs to be an ability to control costs, especially when the main contributor to volatility is the weather. A lot of farmers have the concept that bigger is better, however this isn’t always the case. The shift in thinking towards lowering and optimising unit cost, rather than producing the biggest yields, allows the focus to be on cost of production and keeping it to a minimum. Those with a lower unit cost will be the last to suffer in the hard times and the first to prosper when the prices rise.
The ‘gfw-Farm’ team at George F White is often approached and called upon to review farm businesses and assess where unit costs can be reduced. Regular analysis of cashflows and budgets helps improve the efficiency of a business. Alongside this, priority should be given to farming practices and business management skills. The ‘gfw-Farm’ team work alongside businesses looking to restructure and offer technical advice on business planning and farming practices. The use of benchmarking figures and enterprise related budgets help businesses be more forward thinking and anticipate areas in need of improvement.
The warning is don’t become complacent. The best producers are always looking forward. Remaining alert to market volatility will give a better understanding of when to take the right price for the best margin, rather than just taking the best market price. The well run, efficient farming businesses will be those that can seize the opportunity and become successful.