NFU Comment: Price volatility means ‘feast or famine’, say Robert Baker

IS it just me or has farming become even more of a risky business lately?

The weather has been the most notable challenge for us all to contend with during 2012 but this is not the only threat to our business.

We have been fortunate here in this country, and, more particularly, this region, with relatively benign and predictable weather patterns compared to the rest of the world.

Severe droughts, floods or extreme frosts are more usually attributable to foreign nations while we have enjoyed a more temperate climate and as a result, more reliable yields.

However, in the past three years, we have had to deal with all of these. In 2010 we suffered severe and early frosts which damaged our sugar beet, in 2011 it was record drought and this year we have had both drought and record rainfall.

Commodity prices have reacted positively and this is helping to offset the lower yields experienced as a result of the weather (for those lucky enough to have unsold wheat of reasonable quality still in the barn) and gross margins will be respectable as a result. Not everyone will be so fortunate and there are plenty of stories about dire yields and appalling quality across the country.

Variable costs have risen sharply, partly due to inflation but also as a result of weeds and diseases being harder to control and requiring more inputs. Cereal yields, in particular, have stagnated and increased input costs associated with growing these crops are now even more reliant on higher output prices for a decent gross margin.

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Fixed costs are my biggest concern, as these have seen the most dramatic increases. Anyone who has sought to replace machinery recently will have been alarmed at just how much it will cost to change a tractor or combine, for example.

Exchange rates, financing costs, reduction in capital allowances and a poor export market for second hand machines are all conspiring to make replacing machinery frighteningly expensive. Add in the cost of servicing, replacement parts and, of course, fuel and running costs are significantly increased.

Purchasing land at today’s values, or even renting land at current market rates, represents a big investment and requires careful budgeting, but huge volatility in both costs and output makes this task difficult.

Forward selling in order to mitigate risk can have a serious impact on overall profitability, especially in a year like this, when prices surge and yield and quality tumbles below even the most cautious of budgets.

Some might argue, although not the consumer perhaps, that the current higher prices are long overdue and should maybe even go higher to reflect our true costs of production. I would welcome a more stable market that regularly produced respectable profits and rewarded investment but what seems more likely is a wildly volatile marketplace, giving either “feast or famine” returns.

If global food supply remains tightly balanced then there is every chance that high prices will remain for a while but what will our businesses look like if prices fall rapidly and we are left with the legacy of these high costs?

: : Robert Baker farms near Bury St Edmunds and is a member of the NFU’s national sugar board.

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