July 19, 2016

19/07/2016: Brexit adds to uncertainty driving volatility in agricultural markets

http://www.ahdb.org.uk/
Image: Seika
UK agriculture needs to build resilience to market shocks now more than ever, according to the Volatility Forum.
     
Meeting at the Livestock Event last week (7 July), the group discussed current work areas and debated what Brexit means for volatility management.
    
With the UK’s decision to leave the EU bringing additional uncertainty to an already volatile marketplace, upping the ability of farm businesses to cope with unpredictable price and cost movements is a key priority.
  
The Agriculture and Horticulture Development Board’s (AHDB’s) Jack Watts, who facilitates the Volatility Forum, said: “Volatility and Brexit have a common theme – uncertainty. Without wanting to speculate, it is possible that Brexit could leave UK agriculture more exposed to the opportunities and threats of global market volatility. We’ve seen this already in the form of a weak pound supporting farm output prices but risking an increase in cost of key inputs, such as fertiliser, which are themselves globally-traded commodities.
        
“Longer term, the impact of Brexit on volatility will depend on a lot of policy detail.”
 
At the meeting, the forum was challenged to think about how the industry looks at price, cost and profitability.
  
New rules allowing profits to be averaged over five years for tax purposes were identified as a huge opportunity for the UK industry. By considering profitability and competiveness over a longer time frame, short term price and cost shocks may have less bearing on overall business performance.
  
However, it was recognised that this approach requires a fundamental culture shift at farm level and that cash flow can be an immediate issue.
  
Over the summer, AHDB will be exploring what practical steps businesses can take to prepare for uncertainty driven by volatility, providing insight into the benefit of different management strategies.
  
Volatility Forum Chair Gwyn Jones, said: “There is an argument that only looking at business management in the here and now can turn a period of low prices into a crisis. We want to lay down a real challenge to the industry to think about how it measures performance over time and uses that information to strategise for the future.
  
“We do realise this approach faces some barriers, for example for tenant farmers without security of tenure. Also, this makes profitability a longer-term measure, while cash flow remains a short-term problem and as such these two critical elements of farm business would need different management strategies. This is a key area identified by the forum for AHDB to explore on behalf of the industry.”
   
Lastly, the forum discussed how policy influences the ability to manage volatility and has asked AHDB to look at the principles and objectives that drive policy relating to volatility management around the world.
   

Below: Jack Watts explains how farm businesses can take a strategic approach to volatility management at this year's Cereals event. 



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