How Can Risk be Managed in Volatile Markets?

ANALYSIS - Collaboration and partnership are key to managing risk in a volatile market.
calendar icon 1 December 2015
clock icon 3 minute read

Sir Peter Kendall, chairman of the Agriculture and Horticulture Development Board told the National Farm Management Conference in London that managing volatility requires a long term focus.

He said that managing the challenges thrown at the farming sector by the variations in the market can be achieved through measures such as forward contracts, derivatives strategic business planning, formula pricing, cooperation and integration together with the backing of the government.

He said that the British farming sector needs to show that it is best at what it does and it needs to compete with growing imports from countries such as Denmark, the Netherlands and Ireland.

Rising global demand through a growing global population is driving demand around the world, but demand is also growing within the UK, and other countries are targeting the UK's produce.

The challenge of the market is not just in the competition from other countries, but also in events such as changing weather conditions, currency fluctuations, trade policy and political clashes such as the trade ban from Russia and difficulties with Argentina.

British agriculture needs innovation

Sir Peter said that the British agriculture sector needs the tools to manage volatility, but the idea of protectionism and putting up barriers was not the way forward.

He said there will be more trade deals around the world and more markets opening up and farmers will have to live with and manage volatility.

Sir Peter called on the British agriculture sector to be more innovative to attract top students into the industry and he said the industry must also understand and respond to consumer demands.

“We need to recognise and manage the commodity cycle and we need to be ambitious to be able to develop and be competitive,” he said.

Sir Peter said that as Europe is the biggest single trading block for UK agriculture, it needs to do more business in the EU, and it needs to hold a mirror up to what its competitors are doing in this market.

He called on the sector to improve its image to the public at a time when the market is depressed.

“We have to talk up the industry, not talk it down,” he said.

Planning important to mitigate risks

The UK supply chain director for McDonald's, Connor McVeigh showed that through partnership and collaborations, not only had McDonald’s grown as a business, but its suppliers had also grown.

He said that by treating suppliers as partners rather than having binding contracts, it was possible to produce a stable climate with all sides able to take a part in innovation and investment, creating a strong, robust supply chain meeting the demands of the future.

“To develop a world class supply chain, you need to surround yourself with the best suppliers,” Mr McVeigh said.

He added that the partnership approach had also seen benefits in developing sustainability groups within the chain, which have been able to develop tools to reduce the carbon footprint of the businesses involved.

Jimmy McLean, the RBS chairman of agriculture, told the conference that risk management is an integral part of managing a farm business and managing a volatile market.

He said that risk cannot be eliminated, but can be managed and most farmers are already naturally managing risks by responding to problems of disease, pests and weather conditions.

He said that price volatility comes through the volatility of commodity products with increases in demand and rises and falls in production as well as fluctuations in exchange rates and money markets.

He said farmers need to plan to mitigate risk. The need to set objectives and analyse the business needs by controlling loss, transferring risk to third parties through measures such as hedging and also through risk retention by building capital reserves and reducing debt.

“In a world where costs and prices tend to be volatile and where the cushion of price support has been reduced, risk management will become a more important part of business planning,” said Mr McLean.

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