In Europe, New Ways to Manage Risk

In Europe, New Ways to Manage Risk

Breaking with tradition, this Irish farmer uses futures trading and crop share leases to manage volatility and attract land

Like most young farmers, Kevin Nolan is trying to grow his business, pay down debt, and raise a family. What makes this Irish farmer different is his approach. He's breaking tradition and taking a page out of the American playbook.

I met up with Nolan on a beautiful morning at his farm outside of Dublin last November to learn how young European farmers were faring. He farms 700 acres and does custom work on another 450 acres. The average Irish farmer farms 88 acres, so Nolan's base is significant in a country where land changes hand every 500 years or so.

Irish farmer Kevin Nolan uses his skills with futures markets to offset risk and attract more landlords.

Ireland's rented land prices are based on what the Irish call 'conacre,' an 11-month cash rent that goes mostly up regardless of corn prices. Because there are so many farmers competing, prices can be very high, says Nolan. With tough competition land can also end up being 'mined,' or depleted of nutrients.

Nolan's plan is to shift away from conacre to long-term, 50-50 crop share leasing agreements. He's managing volatility with futures contracts – a foreign concept here – to convince would-be landlords they can do better by putting their land (and crop marketing) under his control.

"The landowner provides land while I provide machinery, expertise and the buying power to buy inputs at a more competitive rates because of higher volume," says Nolan. "With grain storage facilities I can get the work done in a timely manner and market the grain at a higher price than most landowners could achieve. We split profit 50-50, so it's a win-win, but you must have the right people and land."

 If he can convince people to agree to seven-year contracts, he has confidence to invest needed fertility to make top yields.

While risk management may sound familiar to most American farmers, it's new territory for Ireland – and Europe in general. Here, fat subsidies have generally made risk management unnecessary; the number one goal is trying to jump through the hoops to qualify for farm program payments under the European Union's CAP (Common Agricultural Policy).

Reputation management

Nolan is working with seven landlords, some of whom care deeply about their farm and some of whom only want to see a check. Two have agreed to the share lease strategy.

"Most of them are just retired farmers, but going forward I expect to set up a website and chase after land," he says. "Reputation is very important. A lot of times, land will come not through the auctioneer but directly to me because I have a reputation for doing the job right."

He expects to add more clients as time goes on.

"It's quite new here, the idea of approaching a potential landowner about farming their land," he says. "It's a very direct approach, and in some cases it might be perceived as too aggressive. But take the guy I know across the road. He has health issues and he knows me and my reputation. He trusted me to take over his 250 acres, which is very productive land. That's why I feel reputation is very important."

While his approach breaks with tradition, Nolan may have a leg up on other European farmers. American farmers are already bracing for a big drop in subsidies with the next farm bill. Europe, laden with mountainous debt, cannot be far behind.

According to the Organization for Economic Cooperation and Development (OECD), the EU and the United States together account for more than 60% of all government support to agriculture among the major developed economies. In terms of total spending, EU agricultural support generally is much higher than in the United States, and the EU alone accounts for 50% of the OECD’s total estimate.

Americans already use futures to manage volatility. Will European farmers follow suit? 

While older European farmers stubbornly insist on the need for government help, most of the younger generation sees the writing on the wall.

How farmers like Nolan adopt to a riskier business climate will determine who will succeed and who will fail.

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