Risk management in the Agriculture sector
As accountants, much of the advisory work which we do for clients revolves around risk. We identify risk, and mitigate it by:
- Control systems
- Will planning and trusts
- Partnership and shareholder deeds
- Pre-nuptial agreements
On a strategic level, investment risk is reduced by portfolio theory, hedging and professional investment management. Basically, if there is a risk, accountants will identify ways of reducing it.
Farmers have an entire industry which operates in an environment full of risk such as:
- Pricing and currency movements
- Dealing with unpredictable large animals and dangerous machinery in an outdoor and often isolated environment.
Some of the risks can be reduced by hedging, preventative sprays and medication, forward sales and insurance but climate and world forces will always be unpredictable.
Over the last eighteen months, a new level of structural risk has been added to the known day to day uncertainties. The Brexit vote has already sparked price volatility, fuelled largely by currency fluctuations. At present these movements are largely positive in terms of sales income. But the cost of imported raw materials and machinery has risen and for foreign workers, currency movements and uncertainty have made the UK less attractive.
Immigration and labour
Post-Brexit we are likely to see further price changes. This will occur particularly in the livestock sectors as new tariffs or production quotas begin to bite. Amongst other uncertainties here is that of timing, so we have little firm idea of what farm prices might look like in the future or when they might change. There is also the impact of immigration controls which may reduce the availability of labour.
Longer term, farm subsidies, which make up a huge proportion of farm profitability, are up for discussion. In recent years the total national agricultural subsidy has been very close to total farm profit. But future subsidy levels will be decided by a largely urban facing UK government which is unlikely to have the same priorities as the Common Agricultural Policy. In terms of risk, we have an unknown future for the biggest source of net income on almost every UK farm.
Finally, we have political risk. Politics is something which many businesses avoid discussing with their clients, but in the current climate, it may be wise to do so. For example, both the Labour party and the Liberal Democrats are looking to increase the take from Inheritance Tax. As by-elections bite and internal wrangling continues, it is by no means certain that the current Government will run its full term – or even make it past the Brexit negotiations.
It may not be possible to mitigate some of these risks in the usual way. However, they should certainly be considered and discussed in the limited window which remains. Initiating restructuring and succession now, with an eye on the future, may be the best advice.
If you would like further advice regarding managing risk in your agriculture business, please contact our team on 01903 234904.