farm bussiness challenges arising from new cap reform · 2017. 7. 18. · marketer risk manager •...

School of Business and Economics

FARM BUSSINESS CHALLENGES ARISING FROM NEW CAP REFORM

Dr. ir. Nikos Kalogeras 30 July 2017

School of Business and Economics Slide 2

Academic Profile

• Assistant Prof. of Marketing-Finance, WageningenUniversity and Research, the Netherlands

• Co-director Marketing-Finance Research Lab (UM) & Maastricht Centre of Cooperative Studies (UM):http://marketing-finance.nl/nikoskalogeras.html

• Adjunct Prof. of Business Economics & Management, MAICh/CIHEAM: www.ciheam.org

http://marketing-finance.nl/nikoskalogeras.htmlhttp://www.ciheam.org/


Recent Academic Activity

• Research Interests: Agribusiness Management, Cooperative Entrepreneurship, Risk Management, Food Product/Service Innovation Management, Sustainable and Informed Entrepreneurship.

• Teaching: Agricultural Management & Policy, Food Marketing-Management, Supply Chain Management, Financial Product Development.

• Outreach: Engagement in EU-funded projects (submitting, acquiring, implementing) and agribusiness industry projects.

Social Sciences Life Sciences


Agenda

• CAP meets new challenges– New Policy Objectives– CAP Budget & Policy Spending– How New Objectives are Addressed

• Challenges for SMEs and Middle-sized Agribusinesses

• Cooperative Business Schemes: Entrepreneurial Aspects, Risk Management, and Innovation


New CAP

Moving from product to producer support and now to land-based approach.

• Response to Challenges external to agriculture:

– Economic: e.g., food security & globalization, declining rate of productivity growth, pressures on production costs, high input prices, deterioration of farmers’ position.

– Environmental: e.g., resource efficiency, soil and water quality, biodiversity threats.

– Territorial: e.g., depopulation of rural areas, social problems, relocation of business.


CAP 2014-2020: Challenges & New Objectives

Economic Viable Food ProductionEnhanced

Competitiveness

EnvironmentalSustainable

Management of Natural

Resources & Climate Action

Improved Sustainability

TerritorialBalanced Territorial

DevelopmentGreater

Effectiveness

Challenges Policy Objectives Reform Objectives


CAP 2014-2020: New Features

• Joint provision of public & private goods – 1st pillar: greening, provision of environmental

goods)

• Efficient, targeted and coherent – Targeted instruments of the 1st pillar complemented

by regionally tailor-made and voluntarily measures of the 2nd pillar

• Member states flexibility – Budgeting and implementation of 1st pillar

instruments– Shared responsibility to strike the right balance


CAP 2014-2020 Budget

2014-2020Ceiling

Pillar 1: Direct Payments & Market-related Expenditures

277.85 billion

Pillar 2: Rural Development 84.84 billion

Total CAP 362.79 billion


Policy Spending

• 1992: market management 90% (export refunds & intervention purchases) 2013: 5%

• Major source of support: direct payments

– Intervention as safety net– 94% decoupled from production– Member states choices on allocation– Transfer up to 15% between pillars target

spending to specific priorities


Evolution of Spending


More Sustainability


More Targeted Payments

• Direct payments: better targeted by limiting support to those who are actively engaged into agricultural activities

• Basic Payments, Green Direct Payments and Support to ANCs contribute to environmental and territorial objectives

• Limited coupled support– Securing the future of potentially vulnerable sectors

• Simplified support scheme for small farmers– Facilitating access to direct payments and reduce administrative burdens

• Redistributive payments – for the first hectares of the farms support SMEs farms


Disparities Reduction

• External Convergence

– From historic parameters progressively adjustedto a minimum national average directpayment/Hecate across all MS by 2020

• Internal Convergence– From uneven historical references fairer and

more converging per hectare payment at national orregional level


R&D: Strategic Approach

MS have to build their RDP’s based on 4 of 6 common EU priorities:

1. Fostering knowledge transfer & Innovation2. Enhancing farm viability & competitiveness &

promoting farm technologies3. Promoting food chain organization (marketing, risk

management, animal welfare)

4. Restoring, reserving and enhancing ecosystems5. Promoting resource efficiency6. Promoting social inclusion, poverty reduction,

economic development in rural areas


Competitiveness of EU Agriculture• Removal of production constraints (e.g., sugar,

dairy, wine) respond to growing world demand

• Modernization measures & Start-up aid for youngfarmers

• Science – practice gap: Farm Advisory System

• Training & Innovation: new EU Innovation Partnership“Agricultural Productivity & Sustainability”

• Producer Groups & Short Supply Chains– Product differentiation– On-farm processing activities– Quality programs


Farm Business Opportunities under 2 Pillars

Pillar 1 Actions/Opportunities

Pillar 2

Green payment Environment Agri-environmentClimate, Organic, Natura 2000

Top-up payment Young Farmer Bus. Development Grants/ higher Investment Aid

Top-up payment ANCs Area Payments

Simplified scheme Small Farmer Bus. Development Grants

Improved Legal Framework

Producer Organization Aid for Setting up POs/ Cooperation & Short Supply Chain


What is “Shareholder” Value?

∑= +

=t

ii

i

RASV

1 )1(t = planning horizon in years

R = costs of capital adjusted for risk

Ai = net cash flow after taxation in year i


Drivers of “Shareholder” Value

Customer

Relationships:

• Branding

Partner

Relationships:

• Channels

• Co-Branding

• Network

Market-Based Assets Market Penetration:

• Faster Penetration

• Faster Trials

• Faster Referrals

• Faster Adoption

Price Premiums

Share Premiums

Extensions

Sales & Service Costs

Loyalty & Retention

Market performance

Shareholder value

• Accelerate Cash Flows

• Enhance Cash Flows

• Enhance Residual Cash

Flow Value

Reduce

Cash Flow

Volatility


Farm Business Challenge: Active Participation

• Strategic Marketing Organizations:

– Agribusiness Cooperatives

• Facilitating Institutions:

– Commodity Markets’ Trade: Futures & Option Exchanges e.g., Euronext


Improved Legal Framework for POs

• Extends the possibility for collective bargaining & delivery contracts to POs, their Associations, & Inter Branch Organizations

• Introduces temporary exemption from certain competition rules (e.g., market withdrawal or storage by private operators) in times of market imbalance


Cooperative Entr/ship

Members, not simple “investors”

Democratic Governance

Democratic Governance Social Capital


Resilience of Coops in Times of Crisis

• Coops can use their base (membership) for funding vs. IOFs that are fully depended on banks.

• Cooperative banks did not suffer so much from the debt crisis in US and north EU countries.

• Growth of coops even in times of crisis


Why Coop Ent/Ship in Needed?


Do Cooperative Systems Exist?


Cooperative Systems Contributions


Agribusiness Coops in the EU


Market Shares per EU country


Cooperative Services: Banking

• EU: 4.000 Coop Banks with 217 million customers , 56 million members, 858.000employees, and 20% market share.

• Most Coop Banks resisted to crisis: not investment toxics, low risk management, long-term relationships with their investors

• Coop Banks support regional development, sustainable economy, and social enterprises.


Co-op Competitiveness

Improving the Competiveness and Member Relationships of Cooperatives

Current research (Kalogeras et al., 2013) shows that:• There is no clear evidence that the coop structure structures perform

better than the more traditional coops

• Although the intention of outside equity is to provide additional capital for growth, this is not necessarily visible in the performance evaluation.

• It is the risk management strategy and relationship with member base that drives coop performances! NEED FOR FINANCIAL INNOVATION


Why Financial Innovation?

Drives value particular innovation in financial risk management

– Vulnerability and Volatility of Cash Flows

Stabile and Predictable Cash flows

– Lower Cost of Capital– Increased customer satisfaction– Loyalty– Retention– Marketing Channel Contractual Relationship Management


Drivers of Financial Risk

• Globalization & Specialization – Reduction in yield-price (natural) hedge– Reduction in natural hedge at product/input level

• Increase in size

• Changes in financial structure– equity structure

Decrease in price risk absorption capacity

Price risks Financial risks


Why risk management is a MUST for being innovative?

• To innovate we need capital, or better stated: a low cost of capital!

• Cost of capital is driven by risk management (reduction net cash flow volatility)


Cooperative as Portfolio (Pennings & Kalogeras, 2012)

• Inputs (costs) & Outputs (revenues)

• Volatility in input (prices) and output (prices) drives:– net cash flow volatility residual risk cost of capital

• What is extent of natural hedge?– Co-variance structure of coop’s portfolio

• What risk is left? so called residual risk

Chart1

Revenue

Cost

Portfolio

60

40

Sheet1

Portfolio

Revenue60

Cost40

To resize chart data range, drag lower right corner of range.

Chart1

Category 1

Category 2

Category 3

Category 4

Series 2

2.4

4.4

1.8

2.8

Sheet1

Series 1Series 2Series 3

Category 14.32.42

Category 22.54.42

Category 33.51.83

Category 44.52.85


Chart1

Category 1

Category 2

Category 3

Category 4

Series 1

4.3

2.5

3.5

4.5

Sheet1

Series 1Series 2Series 3

Category 14.32.42

Category 22.54.42

Category 33.51.83

Category 44.52.85



How to manage residual risk?

Risk management instruments:

– Decentrally traded Forward Contracts

– Centrally traded Futures Contracts

– Do not necessarily impact physical flow– Impact cash flow– Separates price physical flow

– These instruments have been around since 1848 What’s new here?!! New exciting developments


What is the value of using Futures Contracts?

• Risk-management instrument– Reducing price risk – Elimination of ‘default risk’.

• Market participants view holding futures as a temporary matter: – They are interested in the cash flow generated by futures trade– …these cash flows complement cash flows from participating in cash

market…


Relationship between Member and Coop: The role of futures contracts

• What about conflicting contract preferences between the cooperative and (part) of its members?

Agreement on product quality, time of delivery and place of delivery but Disagreement on pricing scheme

• Price level

• Cash vs forward contract


Improving member relationships (Pennings & Kalogeras, 2012)


(1) Challenges for Coop AND Farm BusinessFarmer = Producer?

• The changing roles for farmers:

– A farmer is not only the producer but also has to be the marketer Risk manager

• Marketing/risk management capabilities deciding factor in success of (grain) farmers

– Research findings from US and EU farmers


(2) Challenges: Heterogeneity of Members Preferences (Kalogeras et al., 2009)

How can a cooperative continue to be relevant for all members from a value creation perspective?

Heterogeneity in member base

• Farmers have different needs & preferences– Example: Risk management need


Heterogeneity of Cooperative Membership base(Kalogeras et al., 2009)

• Risk attitude and risk perception• Business size• Decision makers’ environment• Level of leverage• Decision-making unit• Personal characteristics of members• Education

Different member segments with different contracting (and risk) preferences


Risk Management Services by Cooperatives

• Cooperative as a portfolio (inputs/outputs)

Example: Cooperative provides risk management services

• Cooperative capitalizes on unique covariance structure(natural hedge): next slide


Example of Grain Coop: Smart use of Futures

Offering of 4 contractual relationships:(spot, pool, futures contract or storage)

Coop lowers cost of capital by

– No actual storage (but instead goes long in futures markets on behalf of producer)

– Use storage facility for other use (e.g. fertilizer)– Reduction in capital costs– Cooperative insures physical flow


Risk Management Services by Cooperatives

These example shows that futures contracts can be a facilitator of:

1. Ensuring physical flow2. Commitment of heterogeneous members 3. Creating direct value for coop4. Provide means such that coop can innovate in for example market-

product combination

Financial innovation (e.g., risk management) accelerates product innovation


Take away message

Key Competence in Improving the Competiveness and Member (Farm Businesses) Relationships of Coops via CAP developments (access to credit, innovation, etc):

Financial innovation (e.g. risk management)

– Improves relationship with members

– Creates value by increased revenues AND lower cost of capital which subsequently enables technical innovation!


Take away message

Why Now?

• New developments in futures industry (new futures that didnot exist before)

• Changing role of cooperatives and its members (farmbusinesses)

• Challenges for farm businesses are becoming significant(CAP 2014-2020)


Thanks for your attention!!!


Introduction to Hedging: Producers Example

Spot Futurest=1 $4.00 $5.00T

$2.00 T

NPR = $2.00

$5.00

- $2.00$3.00 = $5.00+

S

Lt=T $2.00

Número de diapositiva 1Academic Profile Recent Academic Activity AgendaNew CAPCAP 2014-2020: Challenges & New Objectives CAP 2014-2020: New Features CAP 2014-2020 Budget Policy SpendingEvolution of Spending More Sustainability More Targeted Payments Disparities ReductionR&D: Strategic Approach Competitiveness of EU AgricultureFarm Business Opportunities under 2 Pillars What is “Shareholder” Value?Drivers of “Shareholder” ValueFarm Business Challenge: Active ParticipationImproved Legal Framework for POsNúmero de diapositiva 21Cooperative Entr/ship�Resilience of Coops in Times of CrisisWhy Coop Ent/Ship in Needed? Do Cooperative Systems Exist?Cooperative Systems Contributions Agribusiness Coops in the EUMarket Shares per EU countryCooperative Services: BankingCo-op CompetitivenessWhy Financial Innovation?Drivers of Financial RiskWhy risk management is a MUST for being innovative?Cooperative as Portfolio �(Pennings & Kalogeras, 2012)How to manage residual risk?What is the value of using Futures Contracts? Relationship between Member and Coop: �The role of futures contractsImproving member relationships �(Pennings & Kalogeras, 2012)(1) Challenges for Coop AND Farm Business�Farmer = Producer?(2) Challenges: Heterogeneity of Members Preferences (Kalogeras et al., 2009)Heterogeneity of Cooperative Membership base�(Kalogeras et al., 2009)Risk Management Services by CooperativesExample of Grain Coop: Smart use of FuturesRisk Management Services by CooperativesTake away messageTake away messageNúmero de diapositiva 47Introduction to Hedging: Producers Example

farm bussiness challenges arising from new cap reform · 2017. 7. 18. · marketer risk manager •...

Documents