Farmers have always contended with a level of income cyclicality, which has heightened significantly in the past decade.

At AIB, we now consider volatility to be the norm. It is useful to look at farming sectors that have been dealing with volatility for many years. AIB has much experience of banking the pig sector, which has long been exposed to the vagaries of the world market, receives no market support and experiences a high level of income volatility exacerbated in recent years by feed price fluctuations.

Pig farmers have responded to this volatility by improving production efficiencies on an ongoing basis, managing their cost base (in particular, their feed cost), undertaking strong financial management, including cashflow budgeting and building a buffer cash fund in good years to support the business through lean years.

We lend to the dairy sector on the basis of a “through the cycle view” of milk price, factoring in periods of low and high prices.

Undoubtedly, the greatest opportunity to mitigate against volatility lies inside the farm gate. As price takers for both inputs and outputs, improving the efficiency and cost base of the farm is central to remaining profitable, particularly at times of low income.

In 2009, when milk price averaged an historic low of 23c/litre, including VAT, the difference in net margin per litre between the top 10% and bottom 10% of dairy farmers was over 11c/litre, according to the Teagasc Profit Monitor. The bottom 10% made a negative margin in that year. There is considerable scope within the farm gate to improve efficiency and profitability among farms.

Income volatility

While lower cost producers are not immune to the effects of income volatility, they are more resilient to income swings in the long term as they are more profitable at lower output prices and are better able to withstand trough periods over time.

Our core message to farmers considering expansion is ‘‘better before bigger’’. Seek to improve your efficiency and cost base before embarking on any expansion; otherwise, the result will be a multiplication of inefficiencies which result in, either no, or low profits.

Like pig farmers, all farmers should consider how they can ‘‘buffer’’ their business from the effects of volatility. It is worth considering putting some cash aside in good years to support the business through the lean years.

Bank support is also a key component of managing through the farming cycle. At AIB, we take a long-term view of short-term challenges knowing that the cycle will turn.

Solutions are best tailored at an early stage and early contact with your bank is key. In most sectors, a trough period is a time to consolidate, to minimise all non-essential expenditure and look at all opportunities to improve efficiency and reduce costs. The phrase ‘‘never waste a crisis’’ has some relevance in farming.

As unwelcome and challenging as periods of reduced income are, they often force a review of costs, practices and future plans which, painful as this can be, often positions the farm better into the future.