Therefore, all 485 applications for the March FMP event were reduced pro rata to 28%.
Farmers were attracted by the opportunity to lock in some of their milk price for next season at a price dictated by high levels on the futures exchange, and in the physical market, in the current season.
Two further pre-season FMP events will be held, in mid-April and mid-May, and should prove popular.
When the season begins on June 1, seven more FMP events will follow each month, from June to December.
The obligation on farmers to supply some of their milk at fixed prices also helps Fonterra lock in longer-term contracts with customers for dairy products, benefiting all co-operatuve shareholders.
“These fixed price options are important to customers and a key reason why they prefer Fonterra as a supplier,” the director of central portfolio management Bruce Turner said.
Fonterra’s FMP scheme is a way of reducing milk price risk for farmers, and there are other ways such as NZX milk futures contracts and some trading bank products.
Earlier in the current season, Fonterra allocated a total of 71.6m kg at 10 different net prices between March and December 2020, being less than 5% of its total seasonal milk collection.
The fixed prices are based on the average of the NZX milk futures contract settlement prices over three days following the first Global Dairy Trade (GDT) auction of the month.
The quantities offered by Fonterra in four of those events were oversubscribed by farmers’ applications.
For example, last July over 1000 farmers made applications for $6.85 net price and were pro-rata reduced to just 13% of their application volumes.
The prices farmers signed up to varied from $5.87 last May to $6.94 in December, all of which look to be considerably below the outcome of the season, expected to be something higher than $7.50.
But even at lower levels, fixed prices can be a useful risk management tool for farmers who have known costs such as interest and lease payments and fodder costs.
Turner says some customers around the world buy at fixed forward prices (FFP) and use them to bring certainty to their businesses, and to give them the confidence to innovate and launch new products.
An example is a large global pizza restaurant chain wanting to grow its China business.
“Products sold with price risk management solutions also tend to attract higher margins,” he said.
Because Fonterra signs FFP supply contracts, should dairy prices subsequently fall, the FMP scheme poses no risk to the co-op or to farmers who do not participate.
