How to prevent your farm margins yielding to volatility

We understand that there’s an inherent risk to farming; it’s natural when dealing with unpredictable weather and live produce.

It’s always been like this, except the current market is operating within a system far more globalised.

It’s no longer just about what you bring off the field, but how it sits within a delicate geopolitical ecosystem that can change overnight, (as we’ve recently witnessed…)

Wildcards are now more than just the weather, which is becoming more extreme each year thanks to climate change.

Even steadily increasing yields can be eaten away by a volatile political landscape that is increasing input costs.

What you sow

Thanks to increased red-tape following Brexit, trade wars that have reached fever pitch and warfare raging on across the globe, outgoing expenditure is just as volatile as the yields exposed to pests, weather, disease and breakdowns.

How can farmers calculate their projected profits when they don’t know the starting price of production?

We know that when it comes to farming, timing is everything; drill too late, harvest too early, miss your weather window, and the whole season shifts.

One emerging solution we’re witnessing clients using is agri-tech, that can optimise tools for spraying, seeding and soil mapping.

Take, for example, recent waterlogged fields that have delayed spring drilling for some farms.

Emerging technology such as drones, soil sensors and data tools are making the process of farm management more precise, and therefore improving margins.

Except now, farmers are grappling with the same changeable windows of commodity markets that impact production and farm management.

The price of fertiliser and fuel can fluctuate by as much as 30-40% over a quarter (in March, UK-produced ammonium nitrate (AN) was £41/t higher than the same period last year), not to mention the variable costs of energy.

Whilst some farmers are turning to technology to offset traditional risk, so many don’t know about the modern solutions available to them to reduce the growing risk of operating within today’s volatile political ecosystem.

This is where the relationship between financial tech and agriculture is often overlooked.

Methods such as hedging allow farms of all sizes to fix costs, enabling them to better judge that final profit figure with a better idea of what they’re starting with.

Take red diesel, for example, which fluctuates daily, but is overall at a lower price than previous years.

Farmers locking in that price for the next year will be able to plan the cost of running machinery more precisely, in the same way that locking in the price of fertiliser could have prevented farmers feeling the hike in price earlier this year.

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Dealing with demand

It’s not all doom and gloom, though. Amidst changing trading relationships, consumer behaviour is prioritising British produce and local sourcing.

This is all alongside political investment into biodiversity and rewilding, where there are grants available for those looking to make investments into the future health of their land.

Whilst support for local farmers is growing, many companies will be reconsidering supply chains within the context of changing trading relationships, so we can’t always predict an upward trajectory of demand.

Unfortunately, it’s never that simple.

Financial solutions, however, can ensure that the price of selling goods is not eroded by a change in demand or trading routes.

For instance, a UK-based dairy producer whose annual production volume is 19 million litres and was able to secure a fixed price for milk production, regardless of market volatility.

These trades hedged approximately 10% of their exposure over a 12 month period, which can make the fractional difference between a successful yield when it comes to such large production quantities.

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A change of season

The UK farming industry is going through a period of transition. Our advice to farmers? It’s not easy, but those who embrace it are more likely to reap the benefits.

Explore the funds available when it comes to investing into your own land and play into the local demand for fresh, quality produce.

Whilst it’s uncharted territory, modern technological solutions are making farm management more precise, and the truth is, those who aren’t considering implementing these tools are already on the back foot.

When it comes to market volatility, you’re already at risk.

These modern challenges require modern solutions but it’s not about reinventing the wheel, putting these measures in as a safety net simply allows farmers to get on with what they do best, which is running their farm.