Friday, March 29, 2024

Futures can insure farmers against volatility

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Participation in the new milk futures and options market is not speculating about dairy prices but deciding how much of a farmer’s milk production needs price hedging, United States dairy futures broker Brian Rice says.
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“Hedging is the opposite of gambling – it is increasing your odds of survival but not a road to riches,” he said.

“The futures market can be used to capture a profit but the main aim is to insure against loss.

“You could be the best dairy farmer in NZ and be wiped out by one bad year without risk management.”

Hard on the heels of the NZX milk futures and options market announcement, Rice spoke to eight Grow Your Mind seminars organised by the Fonterra Shareholders’ Council for farmers.

Rice was the founder and chief executive of Rice Dairy, Chicago, a futures broker for about 1000 clients, a quarter of them United States dairy farmers and half dairy processors and co-operatives.

Rice Dairy had recently expanded into Britain and was writing an update of its Vault software to integrate futures and options trading with the NZ dairy company payment cycle to predict farm cashflow and provide risk management.

Brokers’ programmes and services, along with revolving lines of credit from banks, would facilitate forward price contracts and other risk management tools for dairy farmers all built on the futures market, he said.

Fonterra’s former guaranteed minimum price scheme was a very good product and Rice was disappointed it was discontinued.

All dairy co-operatives in the US offered optional fixed price contracts to their farmers, which they then offset with forward sales or futures contracts.

“The combination of futures market and physical market provides the farmer with insurance against risk and the biggest risk on NZ dairy farms right now is price volatility.”

Brian Rice

Futures broker

Fonterra was the natural buyer of milk futures contracts for its own farmers, to lock in supply, make better decisions on product options, make forward sales of its products and hedge itself against price volatility.

Futures markets had been around for more than 100 years and were widely used by farmers, commodity producers and their processors in all developed countries except NZ.

As questions from farmers at the seminars confirmed, Rice acknowledged NZ dairy farmers were not falling over themselves to participate in the futures market.

“You need to make a strategic decision, are you in or out, learn from US dairy farmers who have been using this tool for decades, employ best practice and build this muscle.

“Some of the largest dairy farms in the US were early adopters, hedging their milk and their feed grains and have continued to grow during some of the worst downturns.”

Futures provided a hedge against price volatility and their use was a general business practice.

Futures markets dragged in other participants – speculators, food manufacturers, people who had an opposing market position to that of farmers.

“It creates a healthy ecosystem where farmers and food companies hedge their prices and people in the middle get paid for providing the futures market services.

“The combination of futures market and physical market provides the farmer with insurance against risk and the biggest risk on NZ dairy farms right now is price volatility.

“Fonterra shareholders have this belief that Fonterra somehow takes care of the risk for them but it doesn’t.

“You farmers own the price risk.”

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