Addressing Volatility
The rapid spike in feed cost and lag in pig price movement has resulted in Irish pig producers suffering unprecedented losses, writes Michael Mc Keon, however there are tools that can be used to reduce this volatility and maintain a more determinable income.
Irish pig producers are currently (October 2022) entering their 14th month of consecutive losses, albeit the size of the current average monthly loss has decreased. An average 600 sow unit is estimated to be currently losing €10,108/month when compared to €58,696 earlier in the year. The cumulative 12 month loss is estimated at €483,152 (Fig 1)
Fig.1: Estimated losses for an average Irish pig herd (600 sows)
Source: Teagasc PDD
The annual rate of volatility was examined to see if it is becoming a greater issue for the sector over time. In figure 2 a ten year rolling average income for an average size pig unit was calculated and then each respective year, whether profitable or not, was estimated as a percentage variance from this figure.
This illustrated that the volatility, whether the year was profitable or loss-making, increased over the last seven years. While no pig producer will ever complain about volatility when profits are much higher, the inverse lows make it much harder to forecast cashflow requirements and to accurately budget for capital investments.
So what options/tools could be utilised by the Irish pig sector to reduce these annual fluctuations / volatility and maintain a more determinable income?
Fig.2: Annual Income fluctuations illustrated by % variance from a rolling 10 year average
Tools to reduce volatility
A number of tools to reduce volatility are outlined fully in this year’s Teagasc Pig Conference paper. Some of the described tools would require legislative / tax changes, others EU approval and some simply require getting the requisite sector stakeholders aligned to a common purpose of reducing sector volatility. One of the most attractive tools is the Australian Farm Management Deposit (FMD’S)
Farm Management Deposits (FMD)
This system is run by the Australian Department of Agriculture and has been in operation in for over 20 years. It currently contains over $6 billion in savings and in general is well-liked by the Australian farming community. The aim of the system is to help famers deal more effectively with fluctuations in cashflow. It is “designed to increase the self-reliance of Australian primary producers by helping them manage their financial risk and meet their business costs in low-income years by building up cash reserves”. The system allows agricultural producers to set aside pre-tax income which they can then draw-down in later years. The money is only taxed as income in the year that it is withdrawn. There is currently a limit on the amount that can be deposited – currently its $800,000 but is reviewed upwards every couple of years. The scheme is only open to primary producers and to qualify you can’t have an off-farm income in excess of $100,000. Practically all banks and financial institutions offer the deposit facility so the process is very simple as it only requires opening a specific account in your local bank and filling-out a 4 page application form.
The money can be withdrawn as required by the producer after an initial 12 month period. The deduction claimed for an FMD in the financial year cannot exceed the primary producer’s taxable primary production income for that year i.e. can’t be bigger than you taxable income for that year.
This scheme has a lot to offer the Irish pig producer:
- Very easy to set-up and simple to operate
- No oversight structures required
- Scheme is self-financing in a tax efficient manner
- Easy access to funds when required
Conclusion
The sector needs to have a discussion now on what is the most feasible way to address the ‘volatility issue’. Whether FMD’s or another tool is chosen this needs to happen quickly as any fund / system will take a number of years to ‘bed-in’ and to build-up sufficient funding in preparation for the next financial challenge.