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Volatile Farming Markets in CAP Reforms

27 June 2011

The UK and European agricultural sector will have to face up to growing volatility in both prices and income as reforms to the Common Agricultural Policy take shape.

Speaking at a packed seminar during the recent Cereals 2011 exhibition in Lincolnshire, Jon Duffy the CEO of Frontier, part of the Cargill group, warned that as CAP reforms come in, single farm payments will be reduced and the farmers fixed incomes will decrease. In turn this will create a more volatile market.

However, he said that agriculture is very good at keeping up with demand - not through increasing productivity, but by increasing yields through new technology.

"Farmers need to learn how to accept and manage volatility better in order to remain competitive, especially following the tough spring - a season, which appears to be getting drier and drier in the UK," Mr Duffy said.

"Agriculture is good at keeping up with demand, however unpredictable weather and market volatility are here to stay and there isn't a lot we can do about it, so farmers need to invest in collaboration and risk management."

He said factors affecting the markets globally were the rocketing GDP in China and the growth in demand globally.

Biofuels have also had their impact on demand. However, Mr Duffy added that while they have had an impact food production has kept pace with their growth.

"Biofuels are taking no more grain out of the food market than they were 10 years ago," he said.

He said that the high prices at present are being driven by low stocks of wheat and corn and the price is driven by the movement of grain and the exportable surplus on the markets sets the price.

He warned that the global market with have to cope with a rapidly growing population, but the growth in population is away from the areas traditionally seen as crop growing belts.

This will increase trade, but with low stocks, the movement of grain with increase the volatility of the markets.

National Farmers' Union President Peter Kendall argued strongly that market volatility will be increased if CAP reform is not managed well.

"The size of the budget should be decided by heads of state. However it's imperative that whatever happens, we get a fair deal for UK agriculture. We need to produce more, but impact less," he said.

Mr Kendall shared his 'two room' theory on EC farm chief Dacian Ciolos, which was well received by the audience.

"Discussions seem to be happening in two rooms, one for Dacian Ciolos and another for the Foresight report." he added.

He warned that the farm commissioner was favouring greening measures in the reforms that would place greater burdens on the farming community.

"We need to be producing more and impacting less," Mr Kendall said.

"We need the CAP to encourage and not to saddle us with green tape."

He said the way to increasing productivity and improving farms is through better technology.

Mr Kendall added: "The challenge for the UK government will be bringing these conversations together before we go down some of the negative roads that are being talked about."

Mr Kendall also suggested that biofuels could also be used as a "buffer stop" to help manage the grain markets and manage volatility.

"However, if we use buffer stops, we have to make sure that the market is not being manipulated," he said.

Alexis Pouyé from the consultants Offre et Demande Agricole warned: "We are in turbulent times and volatility is here to stay, we must accept that. Farmers have to manage it better. It is the farmers' responsibility to watch the market and then make decisions based on that information."

He said that the farming community has to be prepared and use the market hedging tools to manage the risk and they have to start to understand the market so that they can manage and live with the volatility of the market.

"The key point is to understand the trends and interpret the market. For this information is key," he said.

James Townshend, the chief executive of the Velcourt Group said that farmers in the UK need support because they are facing increasingly high energy, machinery and land costs.

And he warned that the present reforms of the Common Agricultural Policy were leading to too much support for small farming enterprises.

He said the industry could expect a cut of 25 per cent in the single farm payments and he warned that speculative derivative trading would lead to further volatility in the markets.

June 2011

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