Friday, March 29, 2024

Corporate farmers welcome milk futures

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Corporate dairy farmers have been foremost in welcoming the launch of milk price futures and options to build a base of risk management for the New Zealand dairy industry.
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“Anything that will increase the certainty of milk prices and address the challenges of liquidity has to be good for the NZ industry,” Dairy Holdings chief executive Colin Glass said.

Pastoral farmers were vulnerable to volatility in their product and input prices and needed tools for risk management on both sides of the profit and loss account.

“It is quite tricky for dairy farmers to move away from the spot price for milk, if you like, when they are also exposed to variable input costs – you can get trapped.”

Glass said Fonterra’s guaranteed minimum price scheme was divisive and arguably transferred value between farmers, whereas the futures and options could achieve the same ends.

Multi-farm business would look closely at futures but their viability depended on getting through the present downturn and the profound adjustments needed in debt financing and pasture-based dairying, Glass said.

Another Canterbury-based corporate dairy farmer, Craigmore Farming, said it already used both milk powder price futures and dollar futures for hedging.

“We will probably add milk futures to reduce volatile earnings and lock in profits,” Craigmore chief investment officer Che Charteris said.

With annual milk production of 6.5 million kilograms of milksolids from 18 farms and more in conversion and its responsibilities towards investors and equity farmers, Craigmore could not just accept the highs and lows of world dairy prices.

“Dairy farmers don’t get enough sound advice from people who don’t have to get up at 4am every day to milk cows but whose job it is to track markets.

“The industry needs much better risk management tools, including price-hedging and fixed-price contracts.”

Charteris said Craigmore was developing data management products and services that would bring all the loose ends together for the benefit of farmers.

Risk management and price smoothing would help even out milk supply volatility and avoid the NZ industry lurching from record highs to record lows.

Federated Farmers dairy chairman Andrew Hoggard said dairy farmers were kicked around by milk prices and more certainty, by whatever means, would be a good thing.

“However, futures are complex products and farmers need really good, professional advice before jumping in.”

The largest broker for dairy futures contracts in NZ, OM Financial, said the new products would be a useful replacement for company minimum milk price schemes.

Director Nigel Brunel said dairy farmers would need a lot of education, which he was committed to provide along with NZX and other brokers.

Banks needed to get on board with margin finance and day-to-day management.

“Let’s say a farmer wanted to sell a futures contract of 6000kg MS at $5, to lock in that return.

“He or she may be required to deposit an initial margin of 10% and then cover margin calls.

“But if the milk price rises and exposes the farmer to margin calls, the actual farmgate returns are rising also.

“So the banks should be prepared to help farmers with finance, to encourage risk management and build stability in the industry base,” Brunel said.

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