Risk management or “fixing the roof before the rain starts”

09 October 2017

As accountants, much of the advisory work which we do for clients revolves around risk. We identify risk, and mitigate it by control systems, insurance, Will planning, trusts, pensions, partnership and shareholder deeds and even 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 – weather, pricing, currency movements, disease, regulation and indeed the physical risk of dealing with unpredictable large animals and dangerous machinery in an outdoors 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.Agriculture Business & Risk Management

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 in a way which had not been anticipated and for foreign workers, currency movements have made the UK less attractive. Post Brexit we are likely to see further price changes, 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 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 In 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 accountants avoid discussing with their clients, but in the current climate of a hung parliament and a renascent opposition with radical tax plans it would be wise to do so. Both the Labour party and the Liberal Democrats have, for example, expressed a desire to increase the take from Inheritance Tax and the 2017 Labour manifesto suggests tax increases in almost every area. As by-elections bite and internal wrangling continue it is by no means certain that the current Government will run its full term – or even make it past the Brexit negotiations.

Some of these structural risks may not be capable of mitigation in the usual way, but they should certainly be considered and discussed in the limited window which remains to us. Initiating restructuring and succession now, with an eye on the future, may be the best advice an accountant could ever give.

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For further information please get in touch with Sarah Dodds.

This article originally appeared on the blog of our MHA member firm, Monahans.