Managing volatile prices is one of the farming industry’s biggest problems. Inelastic demand and supply means a small increase in supply, which can lead to a larger fall in prices.
We know that our productivity needs to improve to keep up with our international competitors. A once in a generation opportunity to improve our productivity is happening right now with the growth of Agritech. The opportunities within Precision Ag, IOT and Robotics is incredibly exciting and over the next 5-10 years they will transform our industry. However, a fundamental fact is often overlooked by developers, academics and policy makers.
Increasing use of technology requires increased investment; and investment requires confidence in the future.
As volatility increases, farmer confidence drops. Farmers need more predictable income to invest in new technology and bankers need reliable income to support a growing business.
To break this roadblock, farmers need a simple, affordable and low risk tool to help them manage the effects of volatile prices. Put simply they need a risk management tool designed and built for farmers, rather than financiers.
Current risk management tools – futures
‘Futures’ began in Chicago in 1848 as a simple risk transfer from farmers to speculators. From those early farmer-focused days, the market has become increasingly sophisticated and traded for short term speculation.
Expensive: Accounts require £25-50,000 to open
Risky: Margin calls need to be paid in 24 hours if the position moves against you
Complex: Bloomberg style screens and a steep learning curve
Time consuming: MIFID regulations mean that it can take 2-3 months just to open an account.
As a result, using ‘Futures’ as a risk management tool is not viable for any farm less than 400 hectares. That’s less than 3% of European farms and less than 1% globally.
A Stable alternative – insurance
Farmers need to transfer the risk of a price fall in a simple, affordable and low risk way. A more natural fit for farmers looking to simply reduce the risk of a price fall, is insurance. Time poor farmers are already familiar with insurance and the concept of paying a small fixed premium to remove a larger risk doesn’t require explanation. Revenue-based crop insurance in the USA is extremely popular and Stable has brought that same simplicity to British farming.
The Stable initiative is made up of over 200 British farmers, insurers, academics and developers. It’s also supported by Liverpool and Lisbon Universities.
As an industry, we pay a levy to the AHDB to collect ex farm price data on most UK farm commodities and input costs. This valuable industry data is high quality, independent and publicly available. Stable use these indices (rather than a single farmers own business), to calculate the risk of a price fall and settle any payments to replace a farmers lost income due to volatility.
Here’s how it works:
Farmers go online to www.stableprice.com After registering, they answer 3 simple questions. It takes 2 minutes:
How much would you like to insure?
How long do you want protection for?
What price do you want protecting from?
An instant quote is generated which the farmer can accept or reject. Payment is paid in advance or via monthly payments, just like insuring your car.
If the index price falls below the floor price the farmer selects, then Stable replaces the lost income automatically, with no claims process. If the index stays high then the farmer gets more for the physical crop, but loses the premium. It’s simple, low risk and affordable for dairy, livestock and arable farmers.
The platform was designed by a Nuffield Farming Scholar and after three years of R&D goes live in early 2018, supported by some of the UK’s biggest underwriters,stable
Our hope is that our groundbreaking insurance product can help to provide the financial confidence needed to unlock the potential of British farming and enable many more family farms to take advantage of the Agritech revolution.
For more information please visit www.stableprice.com