Dairy farmers could soon be able to trade milk futures contracts, if plans to introduce the first European milk futures trading platform go ahead next month.
The futures exchange is planned to start from 1 August, and is likely to be targeted at farmers as a way of managing price volatility. But several industry experts believe it is milk buyers and dairy commodity processors who could benefit most and are sceptical about how many producers will get involved.
“It is potentially a very useful way of managing price volatility and helping business planning,” John Allen, managing partner at Kite Consulting says. “For milk buyers dealing with multinationals and retailers on long-term, fixed-price contracts, there are immense benefits, as milk is such a large element of their costs – 80% in the case of cheese. Being able to fix a proportion at a set price gives a lot more certainty. But I struggle to see how it will work at the farmer level.”
Most dairy farmers are already on some form of forward price contract anyway and for many, it may be difficult to change, he says. European farmers also tend to be more conservative in their attitude to risk and may not like the speculation associated with buying futures, he says.
Dairy consultant Mike Bessey agrees, adding that milk futures tend to be more of a paper-based exercise for those who feel confident speculating on where prices will go. “You may take out a futures contract to deliver, say, 10,000 litres on a set date at a set price, but you rarely ever get to the point where that milk is delivered. Futures contracts are generally terminated before that point and the farmer either pays the difference, or takes the bonus, depending on where actual milk prices are on the day.”
For futures to be traded, the product must be standardised, so contracts would have to define the milk qualities required, he says.
Milk futures contracts are already available in the USA via the Chicago Mercantile Exchange and may appeal to some business-minded, forward-thinking farmers here, says Mr Bessey. “But effectively you’re gambling on what prices will do, and I think that will be the main stumbling block for farmer uptake.”
There could be more scope for futures trading in the commodity sector, particularly for Skimmed Milk Powder (SMP) or butter, he adds. “You have got to have a standardised product though.”
Quota broker Ian Potter says that if there is a decent volume of trade through the new futures exchange, it could provide a useful barometer for farmers negotiating prices with their own milk buyers. “The Northern Ireland milk option, for example, sees 50-60m litres of milk sold and is a real market, reflecting real prices.
“If results of this [European futures exchange], and things like the Fonterra trading platform are made publicly available, it brings a lot more transparency to the market and gets farmers closer to their milk buyer. But I think futures trading is an observer sport, rather than a participation one.”FW viewpoint
Milk futures trading is potentially a useful way of managing volatile dairy markets, and anything that adds to farmersÕ marketing armoury must be welcome.
But futures trading is, as one expert put it, a Òform of legalised gamblingÓ, and it remains to be seen whether European farmers rush to get involved. As ever, the devil is in the detail, and until we know the contract terms and costs, itÕs difficult to know how well theyÕll be received.
Commodity futures (SMP, butter) may be a more viable option and would at least give farmers an idea of where prices for the end product are heading.
Fonterra launches online auction
New Zealand dairy co-op Fonterra says milk powder trading via its new monthly internet-based auction site, globalDairyTrade, made a successful start last week (3 July).
The site represents a significant change in the way Fonterra sells some of its commodity products, and is said to be a first in international dairy trade. The company expects to sell about NZ$1bn of whole milk powder on the online platform, with volumes growing over time.
European milk futures trading platform
- Allows farmers to forward-sell milk
- Dutch entrepreneur Albert de Haan, Rabobank and RMX involved
- 1 August launch suggested
- Contract details to be confirmed
- Futures contracts rarely delivered on, but could clash with existing agreements
- Farmers generally risk-avers
- More potential for commodity futures eg, SMP, butter