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:
Understanding risk management and hedging.Cause and effect of volatility on the entire dairy supply chain.The role of futures and options.Co-op solutions and supports eg forward contracts.Government policy.Private market solutions eg price insurance.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:
Volatility is here to stay and it benefits no one in the dairy supply chain. A combination of price inelasticity, change in EU policy, increasing US exports and reliance on developing economies have all contributed to this new reality. Long term, volatility will benefit Irish dairy farmers, so long as its acute, short term risks are sufficiently managed. There is no silver bullet solution. What will be required is a toolkit of solutions from all stakeholders in the dairy industry that combined will help manage the volatility we now face.As dairy farmers and co-operatives, we championed the removal of milk quotas. Irish Government policy, via Food Harvest 2020, challenged the industry to expand production by 50%. Therefore, we all have a responsibility to be part of the volatility solution.When farmers are considering a risk management strategy, they first need to quantify what the risk actually is. In my opinion, the biggest risk volatility creates is the risk to cashflow in the lowest of milk price years. Therefore, the main aim to any farmer risk management strategy should be avoid or mitigate against this cashflow risk. If your dairy business can withstand volatility, implementing such risk management tools may only add unnecessary costs to your business. Hedging is a risk management tool that should be viewed in the same light as an insurance policy. It costs money just like an insurance premium. Hedging itself is a simple concept but trusting and embracing it can be difficult. It is an emotional and psychological exercise, involving the human capacity to self-doubt and measure performance against the “what if”. Risk management in whatever form costs money. Therefore, farmers hedging their milk price should only hedge enough milk to survive the lowest of milk price years.In Ireland, we have a two-tiered taxation system that disincentivizes putting aside money in years of good profits to help manage volatility while at the same time encourages spending on capital expenditure via VAT reclaims, capital allowances, etc. to help reduce your tax burden. This has led to a misguided ‘spend to save’ mentality among famers.Dairying is a profitable business and as a result there is little appetite among policy makers and tax payers to support dairy farmers in low milk price years via direct supports. Solutions should come from within the industry and any Government supports should have little or no cost to the tax payer.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
Read more
Nuffield blog: growing 82,000 acres of pineapples in Indonesia
Nuffield blog: 24 flights and still no answer
Listen: farming for the future at Nuffield
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:
Understanding risk management and hedging.Cause and effect of volatility on the entire dairy supply chain.The role of futures and options.Co-op solutions and supports eg forward contracts.Government policy.Private market solutions eg price insurance.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:
Volatility is here to stay and it benefits no one in the dairy supply chain. A combination of price inelasticity, change in EU policy, increasing US exports and reliance on developing economies have all contributed to this new reality. Long term, volatility will benefit Irish dairy farmers, so long as its acute, short term risks are sufficiently managed. There is no silver bullet solution. What will be required is a toolkit of solutions from all stakeholders in the dairy industry that combined will help manage the volatility we now face.As dairy farmers and co-operatives, we championed the removal of milk quotas. Irish Government policy, via Food Harvest 2020, challenged the industry to expand production by 50%. Therefore, we all have a responsibility to be part of the volatility solution.When farmers are considering a risk management strategy, they first need to quantify what the risk actually is. In my opinion, the biggest risk volatility creates is the risk to cashflow in the lowest of milk price years. Therefore, the main aim to any farmer risk management strategy should be avoid or mitigate against this cashflow risk. If your dairy business can withstand volatility, implementing such risk management tools may only add unnecessary costs to your business. Hedging is a risk management tool that should be viewed in the same light as an insurance policy. It costs money just like an insurance premium. Hedging itself is a simple concept but trusting and embracing it can be difficult. It is an emotional and psychological exercise, involving the human capacity to self-doubt and measure performance against the “what if”. Risk management in whatever form costs money. Therefore, farmers hedging their milk price should only hedge enough milk to survive the lowest of milk price years.In Ireland, we have a two-tiered taxation system that disincentivizes putting aside money in years of good profits to help manage volatility while at the same time encourages spending on capital expenditure via VAT reclaims, capital allowances, etc. to help reduce your tax burden. This has led to a misguided ‘spend to save’ mentality among famers.Dairying is a profitable business and as a result there is little appetite among policy makers and tax payers to support dairy farmers in low milk price years via direct supports. Solutions should come from within the industry and any Government supports should have little or no cost to the tax payer.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
Read more
Nuffield blog: growing 82,000 acres of pineapples in Indonesia
Nuffield blog: 24 flights and still no answer
Listen: farming for the future at Nuffield
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