Managing risk in an expanding business

Assessing risk has become a good habit and an increasingly important discipline as the area and complexity of their 650ha tenanted Cotswolds holding has grown Adam Henson and Duncan Andrews joined forces 15 years ago.

“Adam and I met as agricultural students at Seale Hayne some years before we first considered going into business together,” explains Mr Andrews.

“In general terms friendship isn’t necessarily always a good basis for a business partnership, however strong it may be, so at the outset we looked very hard at all aspects of our business proposition before committing.

“Through this process of analysis and forward planning we recognised the real risks to the business at that time. This included borrowings and overheads that were too high for the level of returns.

Bemborough Farm

• 650ha in the Cotswolds
  
• 400ha arable – milling wheat, malting barley and oilseed rape
  
• 400 commercial ewes
  
• Cotswold Farm Park – rare breeds, caravan park and campsite
  
• Tenanted and contract mixed farming and arable consultancy
  
• Joint venture machinery syndicate
  
• Equestrian cross-country course

“We knew we had to restructure to create a stable platform from which to grow the business – a lot of this process was about managing risk and it created a mindset that we have tried to stick to ever since.”

A key risk identified at the outset was over-commitment of capital in machinery and labour on the initial acreage in relation to returns. This resulted in the decision to sell machinery, reduce labour and move to a contractor for much of the arable work.

Perhaps the biggest strategic decision during the restructuring phase was to maintain and build diversity.

Maintaining diversity

The rolling landscape over Cotswold Brash, which dominates the farm, lends itself to mixed farming – as do Mr Henson’s and Mr Andrews’ respective livestock and arable core interests. The business has the added dimension of the Cotswold Farm Park, established by Mr Henson’s father more than 30 years ago.

“For us, maintaining the diversity of a mixed farm has been an effective risk-management exercise,” says Mr Andrews. “We are playing to our strengths and avoiding the potentially more risky scenario of having all our eggs in one basket.

“While the farm park could be seen as adding risk in some areas, the interface with paying customers helps us to explore and develop some exciting new areas to make the business even more robust.

“Visitor numbers have been steadily increasing in the past five years. We try to avoid the risk of declining interest by maintaining standards and adding new dimensions as often as we can.”

With new ideas including the branding and marketing of a beer brewed locally using Maris Otter grown on the farm, the partners risked taking their eyes off the conventional farming business.

Risk management policy

• Balance capital commitment in machinery and labour with area farmed
  
• Maintain and build diversity of enterprises; this spreads profit and cash-flow risk
  
• Recruit the right staff so delegation is possible, but only once justified, allowing management to give more time to strategic planning
  
• Concentrate on seeking premium crops while avoiding niche crops
  
• Invest in technology to make more efficient use of inputs and resources
  
• Develop supply chain relationships which allow more price making by producer
  
• Monthly bank discussion
  
• SFP hedging in tranches to protect exchange rate risk

“Diversifying could in itself create risk if it causes distractions to management time,” adds Mr Andrews. “The key to avoiding this is to stick to defined plans for each part of the business and – once justified – recruit the right calibre of staff.

“It is better, we find, to give responsibility to managers and delegate properly, but we combine this with input from outside specialists.

“On the arable side, we have avoided niche crops and concentrated on proven varieties that deliver a premium product.

“We use a trusted agronomist and take note of R&D – even doing some trials on our own land – and we have invested in technology such as variable rate fertiliser applications and satellite guidance to improve efficiencies.

“With a full-time arable manager taking responsibility, we’ve been happy to expand our arable business through some contract farming and also a joint venture that has helped to justify investment in machinery. Scale also helps to some degree in keeping input costs as low as possible, and we forward-buy fertiliser if this looks likely to be beneficial.”

The approach on the livestock side sees a dedicated manager embracing technology such as electronic identification in the commercial sheep flock, using it to full effect to monitor growth rates and select breeding stock more accurately.

Supply chain

On produce marketing, supply chain relationships are developed with a view to being price makers not price takers.

“We gain a premium for our lambs though membership of the Cotswold Sheep Group and we sell most of our wheat and barley through a pool system with the Crop Marketing Group (CMG),” says Mr Andrews.

“We have access to contract storage through CMG, which avoids the risks of home storage while retaining flexibility around timing of sale. This year we sold up to half of our grain on forward contracts pre-harvest.”

Cash flow

Crop marketing, and particularly timing, is one of the areas discussed with the farm’s Lloyds TSB agriculture bank manager at monthly reviews. Decisions take into account the cost and availability of borrowing and deposit product interest rates.

“Our cash-flow is generally pretty healthy as we have three complementary areas to the business – all part of the risk management strategy – but a good relationship with a knowledgeable bank manager is important when large sums of money are moving in and out of the business,” says Mr Andrews.

“Working closely with our bank has avoided us falling into common traps like using our overdraft for capital purchases such as new machinery, when a hire purchase agreement is more applicable – leaving the overdraft in place to provide working capital.”

Lloyds TSB agriculture policy director Alick Jones says: “From a banking perspective, effective risk analysis is an important indicator of a well managed farm business.”

“While this year will be more difficult than the preceding few years, the well-reported fundamentals of global demand for food continue to give an overall positive outlook for the sector.

“Bank of England figures show that at June 2012, lending to agriculture was up 7% year on year, and the sector still benefits from some of the most competitive interest rates.”

Managing the risk on this year, the farm’s single farm payment has seen the business using forward exchange contracts to hedge its payments over the past three years, splitting the commitment to reduce risk.

“We’ve benefitted from this in terms of the value attained, but more important is the security and planning capacity of knowing what it will be in advance,” says Mr Andrews.

In the longer term, the Henson-Andrews partnership would prefer the business to be profitable without reliance on the Common Agricultural Policy.

In the past, a 110ha block was put into an eight-year arable reversion scheme as part of the risk management strategy, but looking forward the uncertainty around the current reform proposals is a frustration that does little more than stifle innovation, say the partners.

Adam Henson is Lloyds TSB’s farming ambassador, promoting a better understanding of financial and environmental sustainability in farm businesses

More on this topic

See some of our previous instalments in this series: