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Fonterra suppliers keen to plug into the December guaranteed milk price (GMP) offer will again be asked to apply at five price levels, the same methodology used in the under-subscribed June offer.
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Fonterra’s board will announce in early December an updated 2014-2015 season milk price forecast which will set the opening price for the December GMP offer for 20 million kg milksolids (MS), Fonterra’s head of origination Arron Atkinson said.

Applications will then open for GMP milk supply at five prices in 10c decreases, starting with, and including, the announced forecast price.

Bay of Plenty supplier David Jensen said the five-price methodology was “too cute” and that Fonterra should nominate a price, telling farmers to take or leave it.

But Atkinson said the one-price method, used in Fonterra’s 2013 GMP pilot, pleased no-one, after being 152% oversubscribed, leading to a drastic scaling back of supply volumes.

Farmers responded that scaling created uncertainty, the opposite of what GMP was introduced to secure in volatile market times.

“Scaling has issues. Our belief is that farmers are pretty good at auctions and tenders, they’re a natural part of the world they live in, so we said here’s (the 5 prices) an economical rational way to do it.

“Fonterra is not imposing a price. This is entirely about farmers working out among themselves who wants more certainty than the other.”

June offer-takers are so far in the money. They will be paid $7/kg this season.

That was Fonterra’s opening season forecast price before it plummeted to $6 as international prices dipped and the dollar stayed high.

The June offer for supply of 40 million kg MS was undersubscribed, so all applicants got the top price of $7. 

The advance rate for the season was locked in when the GMP contract was signed. Applicants chose what percentage of their total seasonal production they wanted to supply on GMP. The maximum offer was 75% of estimated production for the current season, the minimum, 10%.

Going GMP was like choosing a fixed bank interest rate over a floating or variable rate.

“What we want our farmers to do is every year review their business, understand the impacts of volatility on it, quantify those impacts, consider what will happen if interest rates go up, the milk price goes down and then manage those impacts,” Atkinson said.

GMP was designed to spare farmers the pain of the roller-coaster international commodity price ride, but also to be profitable to Fonterra.

Like some farmers, some Fonterra customers wanted stable pricing fixed into the future to give certainty to their businesses, he said.

Fonterra charged customers a premium to deliver that certainty, then matched their demand to a GMP or other product pricing, which could include the use of dairy futures.

“We make a pretty reasonable margin.”

Fonterra was comfortable with the current regime of 4-5% of its total annual milksolids collection – last year 1.4 billion kg MS – being tied in to GMP, Atkinson said.

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