There are now three certainties in the life of an Irish dairy farmer; death, taxes and volatility.
Like its two predecessors, volatility cannot be avoided but it can be managed to reduce the effects it can have on farm businesses.
I undertook a Nuffield scholarship to learn about risk management and how the Irish dairy industry could best manage the volatility in dairy prices that we now experience. I spent 15 weeks in total over the past two years travelling as part of my Nuffield Scholarship, visiting over 10 countries.
A mind that is stretched by a new experience can never go back to its old dimensions
Although I have never believed in the term ‘life-changing experience’, undertaking a Nuffield scholarship is certainly a character-changing one.
It takes you out of comfort zone and plonks you in a room full of international agricultural leaders who challenge your long-held ideals and thought process. For two years, you are exposed to industry leaders, key policy influencers, progressive farmers and new, cutting edge research.
China GFP Group, Mengniu Dairy Visitor Centre, Inner Mongolia
While my Nuffield Report is a culmination of my own personal study topic, without a shadow of doubt the highlight of my Nuffield experience is the time spent with my fellow 2016 International Nuffield scholars.
The week-long Contemporary Scholars’ Conference and six-week Global Focus Programme will live long in my memory and provide me with lifelong friends, a warm welcome and a bed for future travel to far-flung countries.
For my personal topic of “Risky business: managing dairy volatility” I travelled to Australia, China, Canada, America, the UK and Brussels.
I held over 60 meetings with stakeholders in the dairy industry; from farmers to processors, policy-makers to private risk management firms.
Some highlights of my trips were walking the trading floor of the Chicago Mercantile Exchange (CME), meeting successful Irish dairy farmers in South Dakota, seeing the resilience of Australian dairy farmers in the face of volatile weather patterns and learning first-hand how the Chinese people like to develop business relationships.
”Ganbei”… Toasting success with our Chinese hosts, Beijing
The aim of my research was to investigate the role risk management plays in dealing with volatility and what solutions are currently available in other dairy exporting nations, at farm-, industry- and government-level and then to determine what is best suited for the Irish industry.
The key areas of interest for me were:
Volatility
“Dairy men are cowboys...and they don’t even know it”
These were the first words uttered by Nelson Neales, head of risk management at Land O’Lakes Co-op when I met with him to discuss dairy risk management in the US.
What he meant by this was farmers always want to ride the wave of rising milk prices, always believing that they will continue to rise, not locking in when they are profitable and just end up riding that wave right back down to the bottom again.
Our ingrained appetite for risk and eternal optimism that gets us out of bed every morning can also be our downfall when it comes to milk price.
Some of my key findings are:
1. Develop a resilient business
Dairy farmers need to develop resilient, efficient businesses to survive the effects of volatility. It is the first step and most effective step in risk management. A return to regulated markets should be resisted at every opportunity.
2. Know your ‘magic number’
This is a dairy farms’ cash breakeven point. By knowing this they can decide on a risk management strategy, varying from the ‘do nothing’ approach through to hedging as much inputs and outputs as possible.
3. Develop and expand physical contracts
They offer the simplest and cost effective way for farmers to hedge their future milk price. They are hedging and income averaging rolled into one. The use of the Futures market should only be used to manage the risk that physical contracts cannot.
4. Volatility cashflow loan
A new EU and Government supported loan scheme similar to the Agriculture Cashflow Support Loan Scheme should be developed and become EU’s primary dairy risk management tool. A ‘Volatility Loan’ fund of €150m would equate to 2-3c/l on Irelands annual production. It would be drawn down when milk price falls below a certain price point and then be repaid when it goes above another set price point. Such a fund would be cost neutral to the tax payer.
5. Taxation deposit
A taxation deposit scheme beyond Ireland’s current income averaging scheme is urgently required. This would allow farmers to build a rainy day fund in a tax efficient manner.
Although this will require a change in State Aid rules, similar schemes in New Zealand and Australia have been shown to be highly effective cashflow management tools.
You can read Peter’s report in full on the Nuffield International website
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