Price risk management for farmers. 2 Farming is risky! Weather Animal/plant health Financial Assets...
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Transcript of Price risk management for farmers. 2 Farming is risky! Weather Animal/plant health Financial Assets...
![Page 1: Price risk management for farmers. 2 Farming is risky! Weather Animal/plant health Financial Assets (fire, theft…) Personal/family member health/injury.](https://reader036.fdocuments.net/reader036/viewer/2022062714/56649d155503460f949ea95d/html5/thumbnails/1.jpg)
Price risk management for farmers
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Farming is risky!• Weather • Animal/plant health• Financial• Assets (fire, theft…)• Personal/family member health/injury • Third party accident on your farm• Risk of extreme volatility
• Of milk price• Of input cost• Therefore, of income
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• Improve cost efficiency
• Adopt best farming practice
• Diversify
• Avoid overstretching financially
How to mitigate income risk?
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As the last link in the chain, what farmers can do to manage extreme volatility is limited in the absence of specific risk management instruments.
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What to do about price/income risk?
HEDGING
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Hedging: A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities.
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Why seek to hedge income risk?
To know what is coming and be able to plan!
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Why seek to hedge income risk? • Extreme income volatility has undesirable consequences
on farms• Cashflow planning• Investment
• It also has undesirable consequences at processing/marketing level• Investment• Substitution• R&D
• Risk management measures count in farmers’ favour when applying for credit applications from farmers
• Hedging gives you greater visibility and certainty to help you plan
• Can you afford to take the risk?
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Cost of hedging risk?
• You’re spared the troughs, but you forego the peaks
• International studies suggest you lose out compared to taking the market price on the day – but not by much
• This is the cost of certainty/predictability for a period
• You have to decide: is it worth it to you?
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Source: Dairy Farmers of America
Example
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A few examples of risk management mechanismsUS Margin Protection Programme for Dairy Producers
• US Govt run insurance schemeFixed price/margin contracts
• Glanbia, Morrison (UK retailer) for liquid milk supplies (new)
Fonterra Guaranteed Milk Price• A new fixed price scheme only available this year
Pricing options offered by Dairy Farmers of America • US co-op scheme
Tax based schemes• New Zealand and Australia
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US Margin Protection Program• New government run scheme (Agricultural Act 2014)• Dairy farmers (established or new) can opt to lock in
margin over feed costs for 25% to 90% of reference production
• They can choose their mini margin level between US$4/cwt and US$8/cwt (6 to 14 €cents/litre)
• Default/mini is US$4 for 90% of production, for free except admin fee (called catastrophic cover level!)
• Cost: $100 flat admin fee, plus payment of premium pro-rata to cover chosen, also varies per period and per production level (see next slide)
• Benefit: payment of difference between actual margin over feed costs and covered margin
• Scheme very recent, so no clarity yet as to how well received by farmers
• More info at http://www.futurefordairy.com/program-details
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Premia for MPP-Dairy, exclusive of $ 100 administrative fee (in €cents per litre)
Tier 1 - 2014 to 2015 Tier 1 - 2016 to 2018 Tier 2US$/cwt €cents/litre CPH over 4 m lbs (1.7m litres)in €c/l
$4.00 7.09 0 0 0$4.50 7.98 0.000001 0.000002 0.000004$5.00 8.86 0.000003 0.000004 0.000007$5.50 9.75 0.000005 0.000007 0.000018$6.00 10.63 0.000007 0.000010 0.000027$6.50 11.52 0.000012 0.000016 0.000051$7.00 12.41 0.000029 0.000038 0.000147$7.50 13.29 0.000040 0.000053 0.000183$8.00 14.18 0.000084 0.000084 0.000241
Example of cost: covering US$ 7/cwt (12.41c/l) for 2014/15 for producer with Covered Production History of 1.5m l = € 4333.33
Margin coverage level thresholdCPH 4m lbs or less (1.7m litres) in €c/l
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Fixed price/margin contracts• Glanbia
• Fixed price + partial cost indexation. Based on sharing risk between customer, Glanbia and farmer. 4 x 3 year contracts thus far, approx 15% of GIIL milk bought through this. Well received by farmers (oversubscribed)
• Morrison (UK retailer) for liquid milk suppliers.• Still in development (only mooted this month)• Plan to pay farmers a 3-month price based on
rolling average of index butter and milk powder prices
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Fonterra Guaranteed Milk Price • Introduced Summer 2014, after successful pilot of 328 farmers
for 13/14 season• Pilot: NZ$7/kg MS(approx 30€c/l) 15m kg MS, oversubscribed so
every farmer had to be scaled back to 40% of application.• Proposed 14/15 scheme: 60m kg/MS in 2 tranches – 40m kg in
June with 12 months GMP, 20m kg in December, with 6 month GMP. June tranche only attracted 26m kg MS.
• June tranche price options: farmer can choose percentage of estimated milk production and “bid” for a fixed price of $6.60, $6.70, $6.80, $6.90, or $7 –$7 was the opening 14/15 forecast price.
• If oversubscribed, mechanism to adjust individual bids, not dissimilar to Milk Quota Exchange mechanism! Hence not all farmers will get any or all milk covered.
• June: all farmers got $7.• Scheme based on link with customers who are offered an array
of risk management options.• More info on www.fonterra.com
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Dairy Farmers of America options offered to farmers• Pricing options based on product mix quotes from USDA
(Class III (cheese) and Class IV (powders/butter) milk price quotes)
• Pricing options based on monthly cheese USDA quotes (apparently most relevant to California producers)
• Pricing options based on “Target Blends” – including more products to offset the volatility of the Class III and Class IV commodities
• Options including feed cost riders (corn, soya or a mix (milk feed))
• Co-op offers simple options to farmers based on above, and farmers choose to avail of one option or another, or to take the going price on the day.
• More info at http://www.dfariskmanagement.com/pricing-products
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Source: Dairy Farmers of America
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Tax-based schemes• Available to farmers, fishermen and foresters in New
Zealand (Income Equalisation Scheme)• Farmers put away funds in special tax-exempt savings
accounts in good years• Bring funds back into business within 5 years to be
taxed as income in poorer years• Similar scheme available to Australian farmers (Farm
Management Deposit Scheme)• Basis for IFA proposal for a similar scheme – but not
retained in the Agri-Tax review
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Conclusions • Farmers more likely hedgers than speculators: they simply
cannot afford the risk• Price volatility of milk and feed cannot be avoided, only
managed• CAP and EU dairy policy post 15 have a part to play• Irish industry must come forward with innovative
hedging/contract options• Any mechanism must be
• Voluntary for the farmer• Must not interfere with the “real” market price
• Government must review tax-based solutions• EU must provide supportive policy environment