Profit in a bear market

Is it possible to make profits in a bear market?  The answer according to an expert panel is a “yes” albeit a cautious one. 

Addressing the topic at an Oxford Farming Conference event held at Cereals 2016, Sebastian Mallet highlighted one major weakness common to most UK arable farmers – too much attention is being paid to agronomy and not enough to marketing.

Mr Mallet, who has worked around the world, including in South America and Ukraine, with Paris-based grain marketing consultant ODA, reckoned this is a particularly British problem. “Since I became involved here I have been impressed by your agronomy skills but amazed at the lack of sophistication regarding markets. You rely on buyers for information which is surprise in such an educated country,” he chided.

“Remember a buyer will quickly adapt to the professionalism and knowledge of the seller!”

Very good agronomy might add 20% to crop output but good marketing could add 60%, he added.

If there was any comfort to be had Mr Mallet said, he didn’t believe cereal farmers were in the midst of what would become a long term bear market.  The fundamentals could change quickly.

Ian Ashbridge, consultant with Bidwells in Cambridgeshire pointed out that business resilience and business viability were two different things. The best farm businesses still had to live with poor commodity prices but they were very aware of cost of production and margins. “Turnover is vanity, profit is sanity and cash is king,” he reminded the audience. Maintaining a healthy cash position was vitally important and cash flow imperatives often outweighed the lure of an extra £5 per tonne sometime in the future.

He continued: “The best farmers surround themselves with advisers and partners. No man is an island. I have also noted that attention to detail is common amongst top farmers.”

A very good example of this was fellow panelist Connor Colgan, a native of Northern Ireland now farming 800 acres of beef and arable in Northumberland. Wholesale changes in his farming system had not been necessary to maintain resilience but he was constantly looking at ways of reducing cost of production. For example, he had been able to control a big slug problem by simply rolling at much lower speeds. “Slug pellet use has dropped to a third of what it was but I have to drive the rollers myself- no one else wants to go as slowly!” he said.

Knowing costs and selling forward to embed margins were all part of building in resilience for Mr Colgan. Others may be more cavalier.  He had recently looked at a Farm Business Tenancy opportunity but soon realised that a bid of £150 per acre would result in him still owing the bank £30,000 after nine years. He withdrew but later learnt that the successful offer was believed to be £260 per acre.

Support payments were hardly mentioned during the debate but there was a round-up of US measures from USDA forecaster Rob Johannsen. Interestingly in terms of post- Brexit possibilities federal crop insurance policies were becoming more popular in the US and now covered 120 crop types. Policies were purchased from commercial insurance companies and partly paid for by government subsidy. “It all started with insuring against crop risk but revenue protection, which blends price and yield, is now the most popular product.  We are noting however that those with better land don’t insure so much,” he said.