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Price risk management for farmers Price risk management for farmers

Price risk management for farmers - PowerPoint Presentation

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Uploaded On 2016-06-11

Price risk management for farmers - PPT Presentation

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

price farmers milk risk farmers price risk milk scheme based options margin income dairy management cost hedging fixed pricing

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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