Ex-farm milk needs forward pricing to deal with volatility

Dairy processors and co-operatives are being challenged to develop forward-selling contracts for milk in a bid to tackle volatility and to allow the development of fixed-price forward contracts for farmers.

Speaking at the Dairy UK conference, FCStone Commodity Risk lead analyst John Lancaster said the industry had left its “walled garden” of stability and volatility was here to stay.

However, the development of forward-selling contracts similar to those used by arable growers could give milk producers more certainty around pricing and co-operatives and processors could secure milk supply and pass on fixed pricing to their customers over a longer period of time.

“In the USA, a reduction in price support resulted in increased volatility, so farmers started to hedge their milk price – this meant they missed the highs and lows of the market and had a much better level of financial stability,” said Mr Lancaster.

“The advantage is that the farmer has a certainty in their price – they would never hedge the whole amount, just a percentage of the milk produced. The main thing is to ensure you cover your fixed costs.”

Additional benefits for farmers include more scope for financial planning, better access to credit and more peace of mind.

“The majority of farmers across Europe forward sell their grains – the concept isn’t incredibly difficult, but how you structure it becomes a bit more difficult. We see it being through the co-ops and the milk processors offering a fixed price to the farmers. It needs to come from both sides.”

To date, consumers and traders are participating but processors have been slower getting on board with this concept because it was a new way for them to do business, he added.

“At the moment there’s the Eurex exchange for butter, skimmed milk powder and whey contracts will be launched later this month. The contracts are quarterly but they are moving to six individual monthly contracts; they will work in the same way with an index, which is the average of Dutch, German and French quotations,” said Mr Lancaster.

“Moving forward education is key for this – it’s a new thing for the dairy industry. We need data and clearer policy direction from the EU.”

Gemma Mackenzie on G+