Market Volatility

The agricultural supply chain is well-known for its volatility, with some at the bottom end of the chain struggling to make ends meet. Particularly throughout Covid-19, those selling into restaurant chains and airports have seen commodity prices plummet, with no demand for months.

But why is our market so much more volatile than others? The real answer is agriculture relies on more external factors than that of other industries. Not only do farmers have to worry about demand for their product, but they also have to worry about crop and livestock growth, grass growth and weather, just to name a few. The long lead times to grow agricultural produce means that supply is particularly price inelastic, with very few agricultural sectors receiving regular income. Not only this, but years when yields are low and costs increase, profitability reduces even further. In the case of weather dependence, this is a factor we are seeing more often because of climate change.

Unfortunately for the agricultural industry, farmers don’t share the same benefits of economic expansion as premium products do. With a low-income elasticity of demand, there are no correlations between higher incomes and increases in food spend which makes our industry even more susceptible to volatility – The pressure to meet the growing demand for high welfare and organic produce only means investment costs have increased.

Factors affecting decision making

So how will this affect decision making for farmers?  When making key farm decisions, such as investing in a new machine or shed, one of the most vital aspects to be considered is cost. But this is not as simple as ensuring funds are available, it’s vital to ensure a reasonable return on investment (ROI) to make the project worthwhile. With large, costly projects, having a volatile milk price, for example, can make budgeting for this particularly difficult with distortion of inputs inhibiting the investment and reducing growth.

As a direct result of volatility, some farmers will vote for the risk aversion option, meaning that investments which could improve productivity and quality of the produce are not invested in, purely because there is an element of risk. Unfortunately, we are seeing this approach leading to more and more small-scale farms selling up and leaving the industry.

The National Farmers Union (NFU) have concluded that risk aversion has led to more farmers purchasing less costly items where ROI is clear, as opposed to putting the groundwork in place to be more productive on-farm, such as investing in robotics or new livestock housing. This is purely down to the fact that long-term planning is seen as difficult within agriculture.

However, making these investments now will, in turn, increase profitability for the future. It’s absolutely vital to seek help and advice, look at the data and make decisions based on this. In our opinion, a 50/50 approach to risk aversion and risk-taking will ensure farm objectives are met whilst maintaining income and expanding at the same time.

If you would like any advice on-farm investments, please get in touch with the Brightshire team, we’d be happy to help.