The price and income volatility challenge for Irish
Agri-Food in a changing policy environment
Dr Kevin Hanrahan
Teagasc
Managing Price Volatility
in the Irish Dairy Sector
Cork Institute of Technology, 3rd September 2012
Outline
• Agricultural price and income volatility and
Irish dairy farming
• CAP towards 2020: What role for policy in
mitigating price and income risk in agriculture
• AgRisk Stimulus Project
Dairy price and income volatility
• Data on input and output prices and incomes
reveals an apparent increase in the magnitude
of the variability of input and output prices
– Technical definitions of volatility will follow in
Declan’s presentation
– Literature on whether there has been an increase
in the volatility of agricultural output prices
depends on the period studied
– Focusing on last 15 years volatility has increased
Source: DG Agri
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
cent/litre
Monthly Irish milk prices (1977-2012)
50
45
40
35
30
25
20
15
10
Monthly Irish milk prices (1997-2012)
50
Stable milk prices with
regular periodic pattern
then period of extreme
volatility since 2007
45
cent/litre
40
35
30
25
20
15
Source: DG Agri
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
10
Monthly Irish Input Prices (1997-2012)
450
350
Increasing output price volatility also
coincident and related to with
increased input price volatility
CAN euro/1000kg
350
300
250
300
250
200
200
150
150
100
100
50
50
CAN
Source: Central Statistics Office
Dairy Meal
2012
2011
2010
2009
2009
2008
2007
2006
2006
2005
2004
2003
2003
2002
2001
2000
2000
1999
1998
1997
0
1997
0
Dairy Meal euro/1000kg
400
Monthly EU average Dairy Commodity Prices
(1997-2012)
500
450
euro/100 kg
400
350
300
250
200
150
SMP
Source: DG Agri
Butter
Cheddar
2012
2011
2011
2010
2009
2009
2008
2007
2007
2006
2005
2005
2004
2003
2003
2002
2001
2001
2000
1999
1999
1998
1997
1997
100
International Dairy Commodity Prices
(Fortnightly 1997-2012)
7,100
Globalisation means that more international
price volatility is reflected in EU prices
6,100
USD/1000 kg
5,100
4,100
3,100
2,100
1,100
SMP (N Europe)
Source: U. Wisconsin
Butter (N Europe)
Cheddar (Oceania)
2012
2011
2010
2010
2009
2008
2008
2007
2006
2005
2005
2004
2003
2003
2002
2001
2001
2000
1999
1999
1998
1997
1997
100
Volatility in Prices and Incomes
• Volatility in input and output prices can lead
to volatility in farm incomes
• The impact of recent market price volatility
on Irish dairy farm Family Farm Income (FFI)
can be shown using NFS data
– These results are average results for the dairy
system and individual farm results will be different
– Highlights the importance of direct income
supports to dairy farm income in a volatile
environment
Volatility and Irish Dairy FFI
80,000
70,000
euro per farm
60,000
50,000
40,000
30,000
20,000
10,000
Source: Teagasc NFS
FFI
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Importance of Direct Payments
80,000
70,000
euro per farm
60,000
50,000
40,000
30,000
20,000
10,000
FFI
Source: Teagasc NFS
FFI excl. Direct Payments
Direct Payments
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Risk Management in Irish dairying:
Mitigating price volatility
• In 2011 NFS Autumn survey specialist dairy
farmers were asked about what were the
most important sources of risk faced
– Institutional, Production, Market, Financial or
Personal ?
Importance of Risk Categories At
Farm Level
Change in environmental standard, change subsidies
(e.g. Institutional risk)
Weather variability, pest and animal disease
(e.g. Production risk)
Price volatility
(e.g. Market risk)
Change in interests charged on the debt of the farm
(e.g. Financial risk)
Health, accidents, lifestyle, successor
(e.g. Personal risk)
Risk Management in Irish dairying:
Mitigating price volatility
• In 2011 NFS Autumn survey specialist dairy
farmers asked about what were the most
important sources of risk faced
– Institutional, Production, Market, Financial or
Personal ?
• Results from 2011 survey show that for 8 out
of 10 specialist dairy farmers market related
risk is the first or second most important
source of risk at farm level
Risk Management in Irish dairying:
Mitigating price volatility
• Specialist dairy farmers were then asked about
their propensity to enter into forward
contracts (as a way of mitigating market risk
associated with volatile milk prices)
• Two Questions asked
– What they thought the average 2012 milk price
would be?
– And then, the same farmer was asked what would
be the minimum average price they would accept
to forward sell 20% of their milk in 2012?
Farmer’s Expectation (in Autumn 2011) of 2012
price and min. 2012 price for 20% forward contract
33
cent per litre
32.5
32
31.5
31
30.5
30
Anticipated average
price 2012
Source: Teagasc NFS
Quoted Minimum
guaranteed price
Why is volatility a problem for
farmers and industry
• Increases the risk premium attached to investment
decisions
• Lowers rate of investment in agriculture and thus
future rate of agricultural growth
– Important given FH2020 targets and possible future
environmental challenges
• At processing level excessive volatility and its
expected effects hinder long-term planning and
discourages investment in plant, product innovation
and brand promotion and customer relationships
Policy, price and income volatility
• Renewed emphasis on the role of agricultural policy in
managing the risks faced by farmers and others in the agrifood supply chain
• Volatility in agricultural input and output market prices and
incomes forms part of the context of current CAP reform
• Volatility and risk management measures under both Pillar I
and Pillar II
– Pillar 1 – sCMO regulation proposal
– Pillar II – Risk Management (Art 37-40) in Rural Development
• Following Lisbon Treaty CAP reform process follows
“Ordinary Legislative Procedure”
CAP Reform Proposals
• Pillar I
– No return to strong market management as a way of stabilising prices
– No return to supply side management as a way of stabilising prices
• Intervention prices maintained at current low safety net levels
• APS retained though with tougher disciplines
– Basic Income Payment’s role in stabilising farm incomes the major
element of risk mitigation policy in Pillar I
• Provisions for use of emergency funds in the event of large
scale animal/plant disease crises
• Strengthened role for PO and APO and “contractualisation”
along lines recommended in High Level Expert Group report
CAP Reform Proposals
• Pillar II
– Risk Management (articles 37-40)
– Subsidisation of agricultural insurance against climactic risk, animal or
plant diseases
– Subsidisation of mutual fund compensation in the event of animal or
plant disease outbreaks or environmental incident
– Subsidisation of income stabilisation tool
• All must be WTO compatible
• EC impact analysis emphasises the need to carefully design
policy interventions so as to reduce problems of moral hazard
• Support for education and training in the use of market based
instruments
– Agricultural derivatives contracts and forward contracts
Income Stabilisation Tool (IST)
• Form of mutual fund with compensation to farmers
who experience severe drops in income
• Need not be related to disease or climactic incidents
• Granted if drop in income > 30% of previous 3 years or Olympic
average of previous 5 years
• Payments to compensate for no more than 70% of the loss
• Maximum support from Community funds of 65%
• IST Would be demanding in terms of information
required to operationalise (income information from
all participants)
Current State of Reform process
• First reading of CAP regulations proposed by EC not
yet complete
• EP COMAGRI members have tabled 7415
amendments to the 4 EC regulation proposals
– Including 2227 amendments to the EC sCMO proposals
– 2127 amendments to the Rural Development regulation
– COMAGRI rapporteurs and shadow rapporteurs will
consolidate these into amendments that will be voted on
• Risk Management and volatility related elements will be
part of the reformed CAP
• It will be necessary to have capacity to understand
impact of new policies on volatility and risk in Irish
agriculture
AgRisk: Volatility and Risk in Irish
Agriculture
• DAFM Stimulus Research Project 10/RD/Agrisk/TMFRC/715
• Two year economic research project led by Trevor Donnellan
involving economists from Teagasc, CIT and UCC
• The project aims to better understand the volatility of Irish
agricultural (particularly dairy) input and output prices, impact on
production and incomes
– Farm level
– Industry level
• Evaluate the impact/usefulness of different risk management tools
(incl. both market based and policy based) in mitigating the impact
of volatility on Irish agriculture
AgRisk: Volatility and Risk in Irish
Agriculture
• Central to the project are outreach efforts to industry
stakeholders
• This workshop is in part designed as one of these
efforts
• These stakeholder events are designed to
– Communicate research results
– To gain understanding of the challenges posed by price
volatility in Irish agriculture and the Irish dairy industry
– To explore the potential of risk management and mitigation
measures at farm and industry levels
Thank – You