UK government backs effort to increase use of agriculture derivatives

The UK government has thrown its weight behind a Home Grown Cereals Authority (HGCA) initiative to encourage UK farmers and the banking community alike to make better use of financial risk management techniques, if the industry is not to be hit hard by increasing price volatility.

Earlier this week, the Department for Environment, Food and Rural Affairs (Defra) granted HGCA £500,000 for a three-year program to educate farmers about the importance of using derivatives to hedge against fluctuations in market prices. The authority said grain prices were known to vary between £60 and £120 per tonne, putting farmers’ incomes at risk at times of market instability.

But the HGCA criticised banking institutions for not doing enough to open up options and hedging products to farmers. The organisation said European banks ought to look to Australia and the US, where price hedging is common thanks to banks having taken the initiative to entice farmers into the markets.

“Overall, the Europeans have a very poor use of the futures markets,” said Julian Bell, HGCA’s senior economist. “Farmers haven’t really changed their attitudes very much and are looking for people out there to do it for them. A better understanding of price risk management can help remove the emotion from selling grain and allow more balanced decision making.”

The conclusion of World Trade Organization (WTO) talks next week in Hong Kong and expected reforms to the European Common Agricultural Policy could significantly increase volatility in European agricultural goods prices. Although the European Commission estimates that agricultural income across its 25 member states would grow by 11.7 % by 2012, they said such fluctuations could seriously hurt the market.

According to the HGCA, farmers could be interested in a whole range of products from interest rates swaps to currency options. In the UK, a third of farmers’ annual income is dependent upon the price of the euro on the one day that grants are issued, making them susceptible to tiny market changes.