Issue No 11, January 1999.

NOTICE: Hard copies of the Australian New Crops Newsletter are available from the publisher, Dr Rob Fletcher. Details of availability are included in the Advice on Publications Available.

18. Emerging Opportunities in Agriculture

13. Risk management

Bruce Gardiner
New South Wales Agriculture
Tamworth NSW 2340
Telephone: 02 6763 1108
Facsimile: 02 6763 1222

[Your attention is also drawn to the articles about risk managment elsewhere in this newsletter]

Prices of agricultural commodities vary over time, often cyclically between boom and bust.

Prices are theoretically governed by the laws of supply and demand. If prices for a particular commodity are high, farmers produce more and prices eventually fall due to oversupply of the commodity.

In practice, other things affect supply, demand and prices, such as:

government subsidies
droughts
floods
exchange rates and
the level of economic growth of our trading partners.

A risk minimisation strategy for trading, aims to reduce the effects of large changes in price. Such a strategy aims to achieve a price which returns an acceptable profit, rather than attempting to maximise a price.

A marketing strategy considers the following questions:

What commodity is produced?
What is the market information and outlook?
What are the costs?
What is the gross margin?
What is the target price?
Should the product be sold or should the price be hedged?
What are the marketing options?

Factors involved with the selection of the commodity need to balance profitability and suitability:

Soil type and natural fertility
Length of growing season
Rainfall pattern and variability
Pasture or cropping types
Fertiliser history
Likelihood of heat or cold stress
The selection of a breed or variety and
The resources available to manage the commodity.

Production risks will include:

Rotations which harbour pests and diseases
Fallowing that might allow pest and disease build up
Weed resistance to chemicals and stubble breakdown
Sowing and its timing
Crop growth including recognising pests, diseases, climate and nutrition
Harvest considering machinery and including breakdown, timing and availability
Weather as a primary factor
Storage, wastage and quality change and
Labour as a supplement, availability and timing.

Price risks will include:

Exchange rate fluctuations
Interest rate movements
Activities of organisations such as the World Trade Organisation and the US Export Enhancement Program
European Union subsidies for agricultural commodities
Overseas production in terms of quality and quantity, that is international competition
The size of the local crop in terms of quality and quantity, that is domestic competition
Information and rumour
Deregulation
Quality assurance
International agreements and
The production of alternatives.

When determining a marketing strategy, the following questions need to be answered:

Does the market seek what we will be producing?
Is it possible to produce exactly what the market wants, at a reasonable profit?
What commodities can we produce?
Why do we produce these commodities?
What gives the commodities value?
What is the market outlook for each of these commodities?
What are the main supply and demand factors affecting the outlook for each commodity?
Can the long term price movements for these commodities be plotted?
What is happening with long term price trends?
Are there any obvious seasonal price rises?
Can recent weekly price movements be plotted?
What is happening with weekly price movements?
What does it cost to produce each of these commodities?
What is happening in the futures and forward markets?
Is there an opportunity to lock in a target price?
What selling methods are available?
What are the advantages and disadvantages of each selling method?
Will it pay to store a commodity?
What are the physical and financial costs of storage?
Would it be beneficial to use the pyramid scale up plan?
Are forward contracts available?
Are forward contracts for a fixed price or quantity, or both?
What are the advantages and disadvantages with forward contracts?

Can the futures market be used?
Can futures assist with achieving our marketing objectives?
Is a niche marketing strategy appropriate?

To protect against market risks, market information about the product is needed, short and longer term trends need to be analysed and this information should be used in management decisions about any enterprise mix on a property.

A written marketing plan is always useful, starting with the main marketing objective.

The plan should consider how and when to sell to the best advantage and how to build some sort of self-discipline into the selling strategy to be adopted.

Any claims made by authors in the Australian New Crops Newsletter are presented by the Editors in good faith. Readers would be wise to critically examine the circumstances associated with any claims to determine the applicability of such claims to their specific set of circumstances. This material can be reproduced, with the provision that the source and the author (or editors, if applicable) are acknowledged and the use is for information or educational purposes. Contact with the original author is probably wise since the material may require updating or amendment if used in other publications. Material sourced from the Australian New Crops Newsletter cannot be used out of context or for commercial purposes not related to its original purpose in the newsletter

Contact: Dr Rob Fletcher, School of Land and Food, The University of Queensland Gatton College, 4345; Telephone: 07 5460 1311 or 07 5460 1301; Facsimile: 07 5460 1112; International facsimile: 61 7 5460 1112; Email: r.fletcher@mailbox.uq.edu.au

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originally created by: GK; latest update 6 June 1999 by: RF