2 Farming is risky Weather Animalplant health Financial Assets fire theft Personalfamily member healthinjury Third party accident on your farm Risk of extreme volatility Of milk price ID: 357474
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Slide1
Price risk management for farmersSlide2
2Farming is risky!Weather
Animal/plant health
FinancialAssets (fire, theft…)
Personal/family member health/injury
Third party accident on your farm
Risk of extreme volatilityOf milk priceOf input costTherefore, of incomeSlide3
3Improve cost efficiency
Adopt best farming practice
Diversify
Avoid overstretching
financially
How to
mitigate i
ncome
risk? Slide4
4As the last link in the chain, what farmers can do to manage extreme volatility is limited in the absence of specific risk management instruments. Slide5
5What to do about price/income risk?
HEDGINGSlide6
6Hedging: A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices
of commodities, currencies, or securities
.Slide7
7Why seek to hedge income risk?
To know what is coming and be able to plan
! Slide8
8Why seek to hedge income risk? Extreme income volatility has undesirable consequences on farms
Cashflow planning
InvestmentIt also has undesirable consequences at processing/marketing levelInvestment
Substitution
R&D
Risk management measures count in farmers’ favour when applying for credit applications from farmers
Hedging gives you greater visibility and
certainty to help you plan
Can you afford to take the risk?Slide9
9Slide10
10Cost of hedging risk?
You’re spared the troughs, but you forego the peaks
International studies suggest you lose out compared to taking the market price on the day – but not by much
This is the cost of certainty/predictability for a period
You have to decide: is it worth it to you?Slide11
11
Source: Dairy Farmers of America
ExampleSlide12
12A few examples of risk management mechanismsUS Margin Protection Programme for Dairy Producers
US Govt run insurance
schemeFixed price/margin contractsGlanbia
, Morrison (UK retailer) for liquid milk supplies (new)
Fonterra Guaranteed Milk Price
A new fixed price scheme only available this yearPricing options offered by Dairy Farmers of America US co-op schemeTax based schemesNew Zealand and AustraliaSlide13
13US Margin Protection ProgramNew government run scheme (Agricultural Act 2014)
Dairy farmers (established or new) can opt to lock in margin over feed costs
for 25% to 90% of reference productionThey can choose their mini margin level between US$4/cwt
and US$8/
cwt
(6 to 14 €cents/litre)Default/mini is US$4 for 90% of production, for free except admin fee (called catastrophic cover level!)Cost: $100 flat admin fee, plus payment of premium pro-rata to cover chosen, also varies per period and per production level (see next slide)Benefit: payment of difference between actual margin over feed costs and covered margin
Scheme very recent, so no clarity yet as to how well received by farmers
More info at
http://
www.futurefordairy.com/program-detailsSlide14
14Slide15
15Fixed price/margin contractsGlanbia
Fixed price + partial cost indexation. Based on sharing risk between customer,
Glanbia and farmer. 4 x 3 year contracts thus far, approx
15
%
of GIIL milk bought through this. Well received by farmers (oversubscribed)Morrison (UK retailer) for liquid milk suppliers.Still in development (only mooted this month)Plan to pay farmers a 3-month price based on rolling
average
of index butter and milk powder prices Slide16
16Fonterra Guaranteed Milk Price Introduced Summer 2014, after successful pilot of 328 farmers for 13/14 season
Pilot: NZ$7/kg MS(approx
30€c/l) 15m kg MS, oversubscribed so every farmer had to be scaled back to 40% of application.
Proposed 14/15 scheme: 60m kg/MS in 2 tranches – 40m kg in June with 12 months GMP, 20m kg in December, with 6 month GMP. June tranche only attracted 26m kg MS.
June tranche price options: farmer can choose percentage of estimated milk production and “bid” for a fixed price of $
6.60, $6.70, $6.80, $6.90, or $7 –$7 was the opening 14/15 forecast price.If oversubscribed, mechanism to adjust individual bids, not dissimilar to Milk Quota Exchange mechanism! Hence not all farmers will get any or all milk covered.
J
une
: all farmers got $7.
Scheme based on link with customers who are offered an array of risk management options.More info on www.fonterra.comSlide17
17Dairy Farmers of America options offered to farmersPricing options based on product mix quotes from USDA (Class III (cheese) and Class IV (powders/butter) milk price quotes)
Pricing options based on monthly cheese USDA quotes (apparently most relevant to California producers)
Pricing options based on “Target Blends” – including more products to offset the volatility of the Class III and Class IV commoditiesOptions including feed cost riders (corn, soya or a mix (milk feed))
Co-op offers simple options to farmers based on above, and farmers choose to avail of one option or another, or to take the going price on the day.
More info at
http://www.dfariskmanagement.com/pricing-productsSlide18
18
Source: Dairy Farmers of AmericaSlide19
19Tax-based schemesAvailable to farmers, fishermen
and foresters in New Zealand (Income Equalisation Scheme)
Farmers put away funds in special tax-exempt savings accounts
in good years
Bring
funds back into business within 5 years to be taxed as income in poorer yearsSimilar scheme available to Australian farmers (Farm Management Deposit Scheme)
Basis for IFA proposal for a similar
scheme – but not retained in the
Agri
-Tax reviewSlide20
20Conclusions Farmers more likely hedgers than speculators: they simply cannot afford the risk
Price volatility of milk and feed cannot be avoided, only managedCAP and
EU dairy policy post 15 have a part to play
Irish
industry must come forward
with innovative hedging/contract optionsAny mechanism must be Voluntary for the farmerMust not interfere with the “real” market price
Government
must
review
tax-based solutionsEU must provide supportive policy environment