Farmers must learn to manage risk better
A South Island farm consultant says dairy farmers must learn to be better risk managers.
They highlight the need for farming businesses to get better at measuring the impact of new scenarios for proactive risk management and enhanced business resilience.
While this requires more detailed planning, the benefit is increased agility to respond to the unexpected in a positive way.
Current fluctuations in dairy prices are a prime example. After record returns last season, prices have now slumped well below the cost of production. This contrasts with the positive forecasts and sentiment about prospects for dairy returns that have dominated industry and media forums in the last few years. Understandably, many are struggling to integrate this new trading environment into their budgets and strategic plans.
No matter how well businesses have done their homework, few will have anticipated the extent of change being experienced. It seems we are in a phase where the randomness of factors influencing markets demands a rethink of traditional forecasting techniques.
Success in this relies on a mix of planning for the future, learning from the past while striking a balance between ‘controlling the controllables’ and letting go those things beyond immediate control.
To be effective, budgets must be based on credible assumptions for business performance and market trends. To accommodate volatility these now need to be calculated on product price and cost ranges rather absolute estimates. This enables quick assessment of the impact of change through budgets that measure ‘sensitivities’ rather than ‘certainties’.
Until now farming businesses have been relatively one-dimensional in their focus on product prices as a determinant of profit. This risks incomplete assessment of business outlook compared to budgeting that places more emphasis on trading margins. Awareness of cost structures against the impact of changing product prices on profit is increasingly important.
Another component of effective forecasting is the ability to learn from history. This applies to everything from climate trends to physical and financial performance. Obviously technology can make a significant contribution here, however I have seen many situations where people have had simple but effective manual recording systems for what’s happened on farm.
This enables identification of similarities between emerging scenarios and past events. Such information can contribute to a pragmatic ‘been there, done that’ philosophy in the face of challenging situations. It reminds farmers that while the circumstances confronting their business may be unexpected, they are often not too different from many of the things overcome in the past. Recognising this increases confidence and self-belief to overcome adversity.
The final ingredient is commitment to ‘controlling the controllables’. This means focusing on areas of influence rather than getting caught up in issues beyond the operation’s direct control.
An option slowly being adopted by New Zealand operators is the ability to fix trading margins. This involves having certainty about key contributors to cost structures and product prices. An example of this is the recently introduced option to secure guaranteed milk prices for a portion of supply as offered by Fonterra over the last couple of years. Interestingly this is reported to have been undersubscribed.
Taking opportunities to fix revenue complemented by proactive management of fixed interest rates and contract rates for feed inputs is likely to be ‘business as usual’ for farming in future.
This more comprehensive approach to forecasting will enable a more agile and timely response to ‘left-field’ events. We can no longer rely on extended lead times that enable anticipation of negative trends. It’s now a matter of defining what these might be and designing response strategies that can be implemented at short notice.
When this is combined with a ‘no surprises’ culture built on high-quality banking relationships, best practice staffing strategies and credible professional advice this strategy can significantly strengthen the business.
Yes, farming is becoming more complex. The big payback from these systems is development of farming operations that can move quickly to capture opportunity that would not exist without change.
• Kerry Ryan is a Tauranga agribusiness consultant. Contact him at www.kerryryan.co.nz
