Muller has revealed how its new Direct Futures contract will work in an effort to mitigate milk market volatility for its 700 non-aligned farmers.
Producers will be able to commit up to 25% of their annual milk supply for up to 12 months ahead into a fixed-price contract, linked to the UK Milk Futures Equivalent (UKMFE).
Non-aligned dairy farmers can choose between locking in at a fixed price for each month or taking the monthly market price derived from the European Energy Exchange (EEC) market monthly price.
Muller base price formula
The forward pricing formula will be calculated using EEX market prices for skim milk powder (SMP) and butter calculated independently by FC Stone/milkprices.com
This price will then be subject to the terms of the payment index, which takes butterfat, bactoscan, somatic cell count and graduated seasonality into account.
- 2p/litre for transport
- 0.55p/litre cost of hedging for Muller (if producer chooses to fix the milk prices in future months)
- 5% processor margin for Muller
Who is eligible?
Muller Direct producers will be eligible if they have produced at least 40,000 litres a month for the past year.
The minimum volume that can be placed on the contract will be 120,000 litres split by 10,000 litres per month, with producers able to decide each month which months they would like to fix.
How will the Direct Futures Contract work?
- Producer A decides to fix up to 25% of their annual milk production at a set price
- Producer A can look up the forward milk prices on the Muller website, published by 1pm every Monday
- On the second Wednesday of each month, the producer can submit a request to fix a set volume at the updated prices shown for up to 12 months in the future
- Muller’s agriculture team will alert Producer A if the trade was successful together with the final fixed future price on Friday
Protection from uncertainty
“Linking a proportion of your farm’s production to the futures market could help to protect your business from uncertainty caused by changes in the farmgate price, said Muller agricultural director Rob Hutchinson.
“Certainty on future milk price will enable you to better forecast your business margin.”
Muller will offer an initial 35m litres of milk into the first 12-month phase starting in September, with a further two phases planned for January and April 2018, which will take the total volume involved to 100m litres.
If the contract is oversubscribed, Muller will divide the volume out with the minimum allocation of 10,000 litres first and then evenly allocate any remaining volumes amongst producers.
“I’m delighted Muller has opted to use FCStone/ milkprices.com UKMFE as the independent and transparent mechanism in helping to operate their new Futures Contract for Muller Direct suppliers, said Stephen Bradley of milkprices.com.
“This contract allows suppliers to take an element of control in order to build some milk price stability into their businesses.”
He added, “At the same time, the ability via the Muller farmer website to lock in volume through fresh deals at a set time each month also adds a new dimension of flexibility for the supplier.”