Other market tools to manage risk through the food chain

Transcription

1 Other market tools to manage risk through the food chain David Sparling Chair in Agri-Food Innovation and Regulation Richard Ivey School of Business OECD Nov. 22, 2010

2 Outline Sources of agricultural risk Market strategies for managing risk Organizational roles in risk Impact of policy on market methods

3 Risks and Impact on Farm Operations Region Atl Que Ont Man % Major financial impact on farm operation 125 % 215 % 355 % 220 % Input costs Market prices of products sold Weather Exchange rates or fluctuations in the value of the Canadian dollar International competition Changing government policies and programs Disease or pests Other % 20% 40% 60% 80% 100%

4 Diseases Contamination/ Adulteration Diversification of markets/crops Market tools to reduce risk Weather Pests Input costs Market acceptance Price Exchange rates Inputs Production Marketing Co-operatives, buying groups, forward buying Drought/cold resistant varieties New systems/ technologies Traceability Price pooling Forward selling, Futures & Options Farm Finances Debt, off-farm income

5 Reducing input risk Main risk is cost Market power - reducing price risk Cooperatives Buying groups Timing Forward buying can reduce price risk Productivity & quality new genetics, biotechnology, genomics and nanotechnology Policy: Improving access to inputs, supporting horizontal coordination

6 Reducing production risk Improved genetics New technologies irrigation, animal management systems, GIS/GPS, RFID New production methods zero-till, soil testing and variable rate inputs Better management systems info. to minimize inputs, optimize production and quality Environmental farm plans to reduce environmental risk and liability Policy: Investment in R&D, education, risk management by diversification

7 Reducing market risk - diversification Decreases market risks as well as production risks Spreads price risk across several commodities Also across several different markets/regions Greatest revenue impacts seen in diversifying between crops and animals Policy: Current systems favour riskier single product

8 Variability of revenue: monoculture and diversification Coefficient of variation Germany UK Estonia The Netherlands Australia Canada Spain Wheat Barley Return Oilseeds Rye Sugarbeet Oat With diversification

9 Marketing risk Reducing risk in current markets Futures and options lightly used primarily for price discovery Hedging exchange rates lightly used Forward contracting more common and use is increasing may inhibit price discovery as the contract price is often private Effective animal health monitoring and response systems to help market access Policy: Improving understanding and access for producers simpler access, smaller lot capability

10 Markets and marketing Main risks for farmers relate to marketing their products - but their main focus is on production 4 P s - Product, price, place and promotion Shifting global demand and competition and customer expectations for safety, quality and sustainability Translating into retail demands for more information driven by investors as well as consumers Policy: Helping producers shift to a market focus understanding and meeting customer needs

11 Organizational strategies - Cooperatives Managing input and/or market risk Largest impact - producer access to markets especially in developing nations Meet market demands for quality and quantity Combine resources, knowledge/skills and supply Packing, processing and/or marketing capabilities Challenges redefining their role in the face of a changing client base and competitive dimensions need for scale, professional management & global focus challenges of financing growth Policy: Supporting horizontal coordination, network development

12 Organizational strategies Contracts and supply chain management Coordinate and control supply chain flows Manage risks along the entire chain success depends on the entire chain Quality risks greater control and information Price risks longer term contracts Supply risk assurance of supply for processors and retailers Market access reduces likelihood of farmers not having access to key markets Policy: Improving vertical coordination & performance education, training, technology, traceability, investment along the chain, not just in farms

13 Organizational strategies - Industry associations/boards Identifying industry risks and opportunities Invest in research and help direct government R&D funding Developing new markets at home and abroad to diversify market risk Developing sustainability/environmental management programs Shaping farm policy and programs Policy: Helping organizations understand their role, develop leadership skills, support for market development and R&D strategies

14 Mitigating and recovering from risks Debt using debt capacity Diversification within the agri-food industry but beyond farming distribution, marketing, processing, biofuels, green energy, agro-tourism Off-farm income Lobbying for government assistance Policy: Non-farm activities are an integral part of farm businesses. How can policy adapt to recognize entire farm family situation?

15 Impact of policy on market mechanisms Crowding out - Business risk management programs crowd out other insurance offerings Governments are assuming more production and market risk reduced need for producer strategies Supporting R&D and tax policy affects business R&D investments and new technology adoption Market development and new organizational models

16 Looking ahead Need for more market focus - international Continued shift to larger farms and greater management skills More activities along the chain Pressure to reduce government involvement in risk management

17 Thank you David Sparling The Chair of Agri-Food Innovation and Regulation is supported by the Agricultural Adaptation Council