IT is difficult for farmers to plan ahead when they don't know what price they will get for their produce and this problem is set to become even more of an issue in the coming years with up and down variations in prices expected to increase even more.
This issue of 'price volatility' was addressed by Donal Whelton, AIB's Agri Advisor in Cork and Kerry, at last week's Listowel Food Fair where he spoke at a farmers' meeting in the Listowel Arms Hotel.
In the past six years, Irish farmers have seen significant price fluctuations in the main output prices for milk, beef and grain, after a decade of relatively stable but increasing output prices up to 2007.
Speaking at the Agri-Finance Seminar organised in conjunction with the Listowel Food Fair, Mr Whelton, who comes from a West Cork dairy farming background, examined some of the options available to farmers to reduce the impact of price volatility on their incomes.
He said price volatility, both in terms of input and output prices, can make financial and cash flow planning much more difficult. In the period 2007 to 2009 farm incomes fell by over 40% to their lowest levels in over a decade, but between 2009 and 2011, farm incomes increased by close to 120% and reached their highest ever level. This level of volatility poses significant challenges for farmers.
Within the farm gate, Mr Whelton outline a number of options available to farmers to reduce the impact of volatility:
Identify areas within the farm business where efficiencies can be made and improved upon, in order to reduce the financial impact of low output prices,
Where possible, build a cash reserve during high margin periods to cushion any deficits incurred during periods of low output prices,
Examine the use of 'forward contracts' such as the fixed milk price scheme, which offer the advantage of price stability,
Forward purchase of inputs can allow more effective cash flow planning,
Adjust capital spending and carry out farm improvements during times of high margins and postpone them during lower margin periods.
"The expectation is that commodity prices will on, average continue, to improve over time, but volatility will be a greater feature of the market in the future than in the past. I would advise those investing in their business to stress test their plans for periods of low output prices and periods of reduced income. All farmers should examine their farm businesses and make the necessary changes to ensure their farm can withstand the effects of future volatility and prosper in the long term," he said
Meanwhile, on the subject of farm investment he said a lot of farmers are now investing to increase efficiencies and better position their farms for the future.
This investment is for a range of purposes including investment in infrastructure, machinery and equipment, land purchase and stock purchases.
The decision to remove milk quotas has resulted in increased investment in the dairy sector in recent years, but farmers across all sectors are investing in the future of their businesses.
On the vexed subject of financing those investments, he advised farmers that building up a relationship of trust with their bank could play an important part in helping them secure loans.