Risk management key to building your farm business for long-term viability

Farming has always been affected by issues such as unseasonal weather, disease and supply and demand balance, but the price volatility in recent years, both for inputs and outputs is unprecedented.

As Irish farmers have become more integrated into a global system, the force of an upturn or a downturn in commodity prices, or currency fluctuations can be magnified. 

So what can you do to protect your farm business from external forces like these?

Within the farm gate the most important action a farmer can take to insulate the business from the effects of falling prices is to be as technically efficient as possible. 

The current situation has incentivised savings in the areas of grass production and utilisation, as well as the use of high EBI genetics.

A risk-management plan and risk-management tools should be considered to manage the important risks facing the farm business. 

The farm business must be robust enough to survive a period of low milk price or an adverse weather event, while still providing an adequate family farm income each year. 

Risk management tools that bring more stability to prices, both input and output must be welcomed — fixed price for a percentage of milk supplied, fixed interest rates on farm debt.

Time is increasingly the most limiting and valuable resource on many farms. Many small to medium-size businesses fail for non-operational reasons, such as growing too quickly and running out of cash, or because the owner is unable to delegate effectively.

To protect your farm business from external forces, the successful farmer will have to reduce the time spent on operational jobs and instead spend more time managing people and the physical and financial resources of the business.

Business skills are essential to successfully manage your farm operation in an increasingly uncertain environment. The increased volatility in farm input and output prices has increased farmers’ awareness of the importance of knowing their costs of production, which in turn will lead to better informed decisions, investing time and money in areas that will generate a return.

The business environment for dairy farming is changing rapidly. Against the backdrop of quota removal in 2015, herd size has increased on many dairy farms, requiring an increased level of skill in the physical and financial management capability of farmers. In a period of low milk prices, financial management capability is vital, especially the calculation of the farm’s break-even cost of production. 

Farmers are reacting to the current low milk price in line with behaviours evidenced during previous periods of low milk price. Farmers are selling beef animals and surplus dairy stock, postponing capital expenditure or expansion, maximising milk production from grass and engaging with their banks.

Ulster Bank has tools available to dairy farming customers to support them when managing short and medium-term cash-flow difficulties that may arise during the current low milk price period. A cash-flow planner is available to assist farmers with budgeting. 

Ulster Bank uses a base milk price of 22cpl plus Vat and constituent bonuses when assessing a farmer’s ability to meet short-term repayments (2016-2017) and their need for additional working capital facilities or a capital repayment holiday. We will continue to use a base price of 28cpl plus Vat and constituent bonuses for medium to long-term applications.

To qualify for these supports, farmers must demonstrate that their farms exhibit what would otherwise be ‘viable’ trading operations and demonstrate long-term sustainability. 

We have an on-going dialogue with our farming customers, the farm organisations, dairy processors, input suppliers and other key stakeholders in the industry, to ensure we understand the needs in the current market and how best to help.

Most farmers are enduring a difficult period at the moment. Those that learn from this crisis and permanently embed operational, business, risk and time management skills into their business will be best placed to protect their business into the future.

Despite the tough trading period for farmers, now is a good opportunity to reflect on current farm performance and replan, building resilience for the future.

A period of change requires all successful businesses to re-examine their basic principles, and learn lessons so that hard-won experience can be put to good use.


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