Hedging can reduce this risky business

The Australian investment bank Macquarie held their inaugural agricultural conference last week. Commodity producers, traders and investors from all over the globe descended on London Bridge to move, shake and share opinions.

Agriculture is very much the flavour of the month. Investors want to ride the current bull wave, be it institutional land purchase, commodity funds or arbitrage. If it says ooh aaah, they want to buy it.

It is 13 years since I left my desk at a commodity broking house in the City. Back then commodities were relatively serene. Bar the odd “weather market”, market movements were a fraction of what we have experienced since 2007.

Meeting traders from my previous career, what surprised me most was their curiosity and interest in the farmer’s opinion. In the ’90s, a commodity trader would only ever ask a farmer his opinion on a choice of welly.

In the years since I returned to the farm, drought years excepted, advances in husbandry and chemistry have made it possible to produce more consistent yields, yet market volatility makes it increasingly difficult to produce an accurate budget.

Some curse this market volatility. Politicians and farm leaders are often heard proclaiming that speculation in commodity markets should not be allowed. Such words are naïve. In commodity markets, two things are a given: no one player is bigger than the market and political manipulation of markets is divisive and ineffective.

So the answer is simple. Rather than belly ache about it, we need to do more to mitigate the risk.

As farmers we are experts at managing the risk for the growing crop. We choose resistant varieties, we endorse a robust fungicide programme, and carefully plan a balanced rotation. Yet we do little, if anything, to proactively manage the market risk that has such an enormous influence on our bottom line.

And we have a multitude of exposures: oil markets, currency, weather, corn, wheat, the edible oil complex and fertiliser. All of these can be hedged, (though not all within the UK) but only a handful of farmers do. Why? Fear of the unknown may be some people’s reason. But expense and complexity scare most away.

The simplest risk management tool, the grain pool, fared so badly in last year’s bull run that many have vowed not to use it again. Forward-selling has its pitfalls, especially in a year such as this, and wheat options are expensive.

So why do American farmers hedge weather, urea, corn, soya, wheat and fuel? It is not because US farmers are smarter than us. It is because their markets haven’t historically been insulated from volatility in the way ours have been by the CAP. They have it drummed into them that growing the crop is only half the risk.

I find it extraordinary that I cannot purchase a fertiliser hedge. It is not even possible to purchase physical fertiliser more than a year forward. Why ever not? Exchange traded funds (ETFs) are an extremely simple tool for trading and hedging commodities, but not those most relevant to UK farmers. UK agriculture should work closer with trade houses to make such mechanisms more available.

As farmers, we need to show that there is a demand for affordable, easy-to-use risk tools.

The traders at Macquarie’s conference all agreed on one thing: markets will continue to be volatile. As farmers, we need to focus on not just the fields behind the hedge, but the “hedge” itself.

Ian Pigott is 41 and farms 700ha in Hertfordshire. The farm is a LEAF demonstration unit, with 130ha of organic arable. Ian is also the founder of Open Farm Sunday.

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