About this site
Discussion topics
What drives resilience
In general, farm businesses have low levels of borrowing. They also tend to have high value assets (in particular their land) making it easier if they need money to tide them over if a shock interrupts their business. This increases the liquidity of the farming sector and reduces the likelihood of business failure. This means that characteristics other than short term liquidity or cash flow are likely to be of far higher significance to the resilience of agriculture than in other industries. However, the high value of farm assets can also represent a significant barrier to those wishing to enter or expand in the industry.
At the level of the individual farm business, income looks like a key driver of resilience. Even though farm businesses (especially those that are owned rather than rented) tend to have large assets against which they can borrow, if they continue to run at a loss or have low incomes, continued borrowing will gradually wear away their ability to make use of these assets as security. This will make them less resilient to any further shock to their business. However, it is not only of the size of the income that seems to be important but also how stable it is. Those businesses with sustained high incomes will be more able to meet any obligations (e.g. interest payments or staff wages) during a shock. A sustained high income can also help to build confidence with lenders. This might make it easier to borrow to finance new investment (or smooth out cash flow). Increasing productivity is the main way farm businesses can work to achieve stable or rising income levels and so bolster resilience.
Some other characteristics which also appear to be important to resilience are:
- the availability and use of skills – in particular business skills;
- the application of research and development; and
- the degree of co-operation and collaboration.
Differences in farmers’ behaviours and attitudes may also be significant.
A range of techniques can be used by businesses to manage the risks they face and so bolster their resilience. These include:
- Diversification of agricultural activities;
- Diversification into non agricultural activities on farm;
- The use of storage, forward contracts and credit markets;
- The use of financial instruments: insurance, futures and options markets;
- More collaborative and co-operative ventures, including joint venture farming and use of sharecropping type arrangements with machinery contractors;
- Increasing competitiveness (productivity) and proactive risk
- Part time farming.
management – in particular through developing and applying skills; and
Across all types of farm business, a significant proportion lack any risk management strategy. Often coupled to little desire to know more about managing risks. The reasons for this are unclear but it seems that farmers don’t see much of a benefit to their businesses from undertaking risk management. This lack of risk management is often associated with the lack of business management skills that is widely found across the industry.
We have drawn on a range of data and indicators to begin our assessment of the resilience of the industry. We want to develop agreed measurements or indicators of the industry’s resilience to help us better define the concept of resilience, decide whether the industry is resilient and determine the success of any future actions. A lot of data is already being gathered on the agricultural industry which has proved useful in helping us to develop our views.
- How might risk management practices be improved? Is the issue principally one of a wider adoption of existing risk management techniques or should some approaches be favoured over others?
- Are there other options that should be considered?
- What might be the best ways of measuring resilience? Can we do more than look at changes over time or differences between different farm types.
- Is the lack of adoption of risk management measures by a significant number of farm businesses a cause of concern?
The three main things that drive resiliance are
1) Hard work and long hours
2) Poverty (the annual incomes for most farming families are pretty low) which drives them to diversify and seek out new options just to survive
3) A general distrust of government initiatives and similar, based on the sound reasoning that if government tells you to do one thing, in five years they’ll be telling you to do something totally different.
You have to remember that in Farming we work on a lot longer timescale that much of industry, and certainly far longer that just the next general election.
As an example of this, take global warming. There is no point farmers taking action now, because it hasn’t happened, but as it happens and as conditions change farmers will change their cropping to match. It isn’t rocket science, we have been altering to cope with changing weather patterns, consumer demand and arbitrary politicial dictat for years.
The secret to resilience of any sort is in diversity. A diverse ecosystem is resilient by definition: if one species fails then there are many others to take its place. Thus a farm run on principles of diversity will be more resilient than one that produces only one crop or product. A farm based on a diversity of inputs and outputs and run on the basis of integration and interdependence between those components will be resilient, whereas a farm that grows two thousand acres of wheat and nothing else will not. Similarly a dairy farm that buys in all its feed will suffer before one that grows its own and returns the ‘waste’ to the fields. Only when farms become smaller, localised centres of mixed food production (small, highly diverse and intensive organic farms have been determined to be the most productive, globally) will true agricultural resilience be the norm. The land is naturally diverse and resilient, it is only our de-naturalisation of it by monocropping and the use of pesticides and nitrogen fertilisers that makes it otherwise.
Whilst in theory having multiple sources of farming income should make the business more resilient we run into the problem that small farms may not be large enough for each particular income stream to cover the fixed costs of that stream.
Also the small farm can suffer if the person/people working on it are too busy working in food production to have time to earn money off the farm. So an entirely arable farm could be more resilient that a mixed farm of the same size because the arable farmer can work off farm for considerable periods. The big weakness of small dairy farms is that looking after dairy cows is a 27/7 job and it is rare that you can be spared from the farm to earn money.
One problem with small farms, which I’ve spent my life on, is that the labour is family labour, and trying to organise holidays and days of is virtually impossible because, strangely enough, husband, wife and children want to take their holidays and days off together.
If we are not careful the romantic picture of the small family farm can actually obscure a situation where the family is tied to the farm, unable to enjoy the sort of time off that the normal family accepts as a right. In fact this begs the question, is a food production system that relies of people working long hours for a low rate of return sustainable?
As a final note, with regards the dairy farm that buys in its food, actually this process accumulates fertility on that farm. The farm that grows its own food recycles the nutrients within the farm, the one that buys feed in not only recycles the nutrients within the farm but also tops up that nutrient ‘pool’ with the bought in feed.
Stocks of real assets (that provide capacity to adapt):
people/
finances/
values & norms/
technology (including social & market system (consider incentives))/
plant/machinery and equipment/
energy-sources
— dynamism – respond to real changes —
In response to Mark: I agree that people are an asset, but I don’t agree that finance can be considered an asset these days; our entire system is based on debt and on continual growth, and neither of these is a sustainable concept, and as such will not provide for resilience. I’m intrigued that you have missed out completely our most important asset (and for many farmers around the world, their only asset), and that is the SOIL. The soil is the basis for all life on earth, and is itself a highly complex living entity, and we trash it at our peril. Up until the last century, farmers in India and China produced highly intensively (and organically, with a net gain in fertility) for forty centuries with no other ‘asset’ than the soil, and we would do well to take heed.
I’m not sure we should be looking at competitiveness in the same discussion as resilience, since they are worlds apart. Competitiveness belongs with the unsustainable systems of the modern world – the monetary system, based on debt and continual increase, and consumerism – the creation and ‘satisfaction’ of unnecessary wants by companies for profit, and consumption above and beyond need. These things are not sustainable, and need businesses to strive for competitiveness in order to bolster them. Competitiveness itself is, therefore, a construct. I believe it’s time to let go of our constructs and think about what’s real.
Sustainability is what we should really be pursuing. No unsustainable system will provide for resilience in the economic world of the rest of this century.
I think that you are looking at ‘finance’ as something rather grander than it would appear on the farm. At our level ‘finance’ means that after paying off the mortgage and the interest payments on the overdraft we still have enough money to support the family and keep the business viable.
When looking at the soil, beware of romance, there are areas in this country which have gone in and out of agriculture over the millennia depending upon the economic and political pressures of the time, thin soils have been depleted, abandoned, and have come back into cultivation again.
I would also beware of talking about talking about “four millennia” when we don’t actually have the records for that far back.
When talking about sustainability, you have to define what is to be sustainable. If you start off by saying we want to support of population of five million, you have far more options as to how to support that population ‘sustainably’ than you do if you wish to support a population of seventy million.
Your agriculture has to be a function of your population; it is your population that has to be sustainable, not your agriculture. We can have a population which is sustainable using organic systems, we have done it, but the larger the population you decide you want, and the higher the standard of living they expect, the harder it is to do.
Jim
Resilience is driven by a “healthy” Balance Sheet and effective use of resources. This use must be sustainable in the medium and long term.
And just to agree with Mark, I’d also stress that balance sheets are healthier if government doesn’t impose increased costs through over-regulation. Farmers are far more resilient if they have money available to deal with the problems as they arise, than if they have already had to spend the money coping with some previous gold plated directive.
Jim
Thank you for all of your comments to date. These will really help us but in the final week we’d like to get as many contributions as possible to help us develop our thinking.
Although we haven’t analysed and assessed the responses in detail, some general points are beginning to emerge.
There appears to be widespread agreement amongst contributors that key to improving resilience is increasing and sustaining profitability, with diversification also being seen as helpful.
There is a wider range of views on what should be done in addressing the competitiveness of the industry. Some contributors have suggested that we need to move to more localised and smaller scale production whilst others have noted how small scale farmers can become tied to the business and unable to draw income from other activities. We have also seen views expressed on a need for larger and more efficient farms. With respect to benchmarking, some concern has been expressed about its practical application and the need for IT infrastructure.
Key risks of animal disease and price volatility have been identified by many contributors, as have impacts on the soil and water availability. The impact of ‘peak oil’ is another risk which has been raised by some contributors.
A number of you have expressed concerns over the impacts of regulation on farm businesses and we have received suggestions on how regulation might be better targeted for the industry.
There seems to be a large measure of agreement about the key areas that we identified for development to improve resilience and competitiveness. The relevance of developing and applying R&D has drawn a number of views, with a number of contributors seeing a need to enable cutting edge technology to be applied. The requirement for increased skill levels in the industry and to develop career paths has also been noted, though concerns over the ability of time-poor farmers to access training have also been raised.
The usefulness of joint ventures has been discussed but better marketing strategies and the use of derivatives have been said by some to be more appropriate for managing risks.
Although the summary above doesn’t capture everything that is in your posts, we will be drawing on the detailed and nuanced points to develop our analysis. We also look forward to seeing more post on these issues as we enter the last week of the discussion.
Andy
Today in the post we received two ‘letters’ from Defra/RPA
One envelope (or more properly bundle) contained “news about the Single Payment Scheme and changes to cross compliance”. The other letter contained a folder titled “Important information from the Department of Environment, Food and Rural affairs on sheep and goat identification and recording from 31st December 2009.
Together these two packages weighted three and a half pounds! Well I suppose it makes a change from Christmas cards, but how exactly does swamping small businesses with both that sheer weight of paper (all of which we will at some point have to read!) and a complex mass of new and repeatedly updated regulation help them or improve their resilience?
Jim
As uncertainty increases, so do risks and the quality of decision-making goes down: more bad decision get made which increases losses.
Economists and ecologists alike make use of some fairly simple tools which allow uncertainty and risk to be taken into account when making risky decisions. These techniques have not penetrated into the farming industry despite being easy to grasp. Part of the reason for this is that too much emphasis has been placed in the past on developing overly-complex decision tools which try to encompass too much information and ignore risk and uncertainty completely.
With continued volatility of input and output prices, the lack of risk management should be a concern for the industry. Exposure to risk jeopardises farm viability in the short term, questions industry potential to contribute to food security in the long term and also impacts on our ability to deliver environmental goods.
That said, the current assessment of resilience assumes that the take up of risk management practices in the farming sector is relatively low and is presumably based on responses to the 2008 Farm Business Survey. In fact, methods for managing risk have become ingrained in farming practice. Simple crop rotation is one form of risk management, so too is providing winter shelter for animals in certain circumstances. Therefore, the number of farmers using some form of on-farm practice to manage risk will be high, although there is clearly scope for improvement.
Some farmers take advantage of risk management tools that are made available by the insurance industry. The NFU’s sister company, NFU Mutual, provides a bespoke risk management service. (see http://www.nfumutual.co.uk/business/business-insurance/risk-managment.htm). These tools might have a wider application.
The use of professional agronomists and advisers ensures a strong focus on physical risks (disease, pests, etc) in some sectors. The farm health planning currently offered to livestock producers in selected regions under the rural development programme is another example of where on-farm, bespoke advice plays a key role in building awareness of risk management and ultimately prompting action. It should be added that the challenge of prompting action will be a particular challenge on farms which have had disease issues in the past or face ongoing disease issues. The business decisions necessary to continue farming could conflict with risk control (e.g. buying in of replacement stock constitutes an inherent risk), whilst the lack of central action in controlling TB vectors will also have influenced attitude to risk control in some areas of the country.
The situation becomes somewhat more challenging when looking at market risks. Outside of arable crops, farmers have few tools to mitigate their financial risk when selling farm outputs. Even within the arable sector, the potential window for crop marketing is not mirrored by the availability of tools to manage the risks associated with purchasing inputs. Adoption of risk management measures is not necessarily the issue, but rather the availability of applicable measures in the first instance. Globally, there are examples of where regulators have sought to stimulate the adoption of futures markets in certain sectors with varying degrees of success. Subsequent stages of exploring resilience should review these options and identify any lessons learnt. Should tools become more available, there is also the challenge of building uptake. Few sectors have experience of using futures markets and some instruction and guidance will be needed. Whilst the providers of risk management will obviously be active in this area, AHDB could also support this role (as they currently do in the cereals sector with risk management workshops).
The food supply chain could play a much bigger role in creating resilience. Risks could be reduced if forward pricing contracts were more widely available and end customers (especially major retailers) were more willing to underwrite prices. Despite the short-term competitive nature of grocery retailing, it should be possible for longer-term agreements to emerge where these mechanisms can be more closely aligned to consumer/ customer objectives (eg in terms of ensuring fair prices). Good examples exist in the liquid milk sector especially and there is no reason why retailers should not be encouraged to adopt these approaches more widely. The likelihood of greater and more permanent market volatility suggests there will be a long-term imperative for manufacturers and retailers to adopt such approaches in order to secure supplies and manage their raw material costs. A recent report by the CBI also pointed to suppliers looking more towards supply chain finance. This may also happen in the food industry with major retailers seen not only as the profit centre of the supply chain but possessing substantial financial leverage that could be deployed downstream.
Supply contracts themselves could be improved in some sectors to give farmers more opportunity to hedge risk. A good example is in the dairy sector where milk contracts currently transfer all risk to producers through exclusivity clauses and complete lack of predictability over pricing. The NFU is leading a major campaign for an overhaul of these contracts and would not exclude the possibility that regulation could play an important role in driving greater fairness in contracts.
The Defra discussion paper is largely (and unfairly) dismissive of the CAP as a risk management instrument. For the NFU this is, in fact, perhaps the most important role of decoupled direct payments, i.e. to provide a degree of income stability to farmers to allow them to stand back from the market, absorb limited financial and market shocks and indeed assist in leveraging finance. The European Commission may be expected to examine how direct payments might be adapted to encourage more sophisticated risk management tools such as revenue insurance schemes or mutual funds.
The challenge of measuring resilience should not be understated. However, it is worth considering that changes to resilience may only reveal themselves historically, by which time there could be limited scope to reduce the impact or reverse the trend. There are a number of potential measures that immediately spring to mind when considering how to gauge industry resilience. These include profitability, production costs, investment levels and gearing. With some effort, factors such as herd health status and land nutrient status could be included into the metrics. Measuring institutional risks is clearly a more difficult challenge, but one that definitely needs including given the potential impact that regulations and compliance can have on farm businesses. It would appear that a follow-up exercise that seeks to establish resilience indicators would be the sensible next step, just as Defra has done for food security and sustainability.
Anyone having trouble accessing the link provided by Phil, you need to remove the closing bracket
John – should work now
http://www.nfumutual.co.uk/business/business-insurance/risk-managment.htm
In the examples of risk management, we should not forget ‘controlling occupational hazards’. We are still twice as likely to be killed while working on a farm as any other workplace. I suggest everybody signs up to “Make the Promise” – google for website.
Cheers Charlie
Resilience: In the 1930s recession one Grandfather had been losing money farming, was in his 60s– he got out; the other was in his 40s, had started farming at 16 and was very “hungry” for success; he took farms that no one else would and ended up with 10.000 acres (he was Free church with a strong work ethic and low personal expenditure!)
During FMD 2002 many farmers were given help by various charities, despite being what the pundits would describe as “non-viable”– and are still farming today.
Resilience or foolishness?– both probably!