Getting Stable: Making uncertain farming futures a thing of the past

Farming income is inherently volatile. Volatility is not new and will remain a constant risk because:

• Supply is price inelastic in the short term (it takes a year to grow most crops)
• Demand is price inelastic (food is essential)
• Supply can vary due to climatic conditions, policy and conflict.

While these macro influences appear abstract, the impact of volatile prices on an individual family farm can be very personal. Effects range from a lack of confidence, under investment and borrowing restrictions to a lack of succession and wider solvency issues.

The focus of this report is almost entirely on Financial Risk Management tools and the potential for modern insurance technology, sometimes abbreviated as ‘Insurtech,’ to deliver a new market-led solution that could help family farms around the world to manage price volatility in a simpler, more affordable and low risk way.

The harvest year 2015/16 was a period when volatility as a topic was rarely out of the farming press. Politicians, unions, the media and farmers themselves were united in the view that something must be done to address its impact. After an initial flurry of activity, little or no progress was made. There is clearly no ‘silver bullet’ to helping farmers manage volatile prices, but this report proposes a solution that could in time make a small contribution to an industry we all care so deeply about.

Historically, most traditional farms were mixed and could use diversification to protect or ‘hedge’ themselves against low prices in one particular commodity. The writer, AG Street, memorably coined the term ‘Up Horn, Down Corn’ to describe this effect. If he had been a statistician instead of a writer, he would have said ‘individual farm prices can display low correlations within a 1 year period’. With farm businesses increasingly specialising in fewer commodity enterprises to capture economies of scale, this advantage has largely been lost. This report examines how emergent ‘Big Data’ technology could bring the benefits of this “diversification effect” back to family farms in the 21st century.

Financial organisations like the Chicago Board of Trade/CME can offer stability and liquidity; yet financial technology ‘start-ups’ present the most likely source of new solutions to old problems. Developments like Smart Contracts, Machine Learning and Chatbots enable us to imagine and design new ways of delivering financial risk management that may be much better suited to the reality of family farms.

Brexit is clearly a time of considerable uncertainty; but it also offers a significant opportunity to rewrite the rulebook for British farming. This report proposes an innovative way for the Government to further help British Farmers with volatile prices, that doesn’t require public subsidy.

Overall, the report was an opportune time to reconsider financial risk management for farmers and ask, ‘What would we build now, if we could start from scratch?