The June offering was the first of seven in this season, to be followed by 10 offerings in every successive season.
Fonterra’s Farm Source group director Richard Allen said the co-operative made 15m kilos available so applicants received all the quantities they applied for.
Farmers can apply to fix up to half of their planned seasonal production and Fonterra plans to offer a total of 5% of its milk collection for a season, about 75m kilos.
Allen said farms of all sizes participated and about 60% of them applied for less than 20% of their estimated seasonal production, implying they are bigger farms.
Some 40% of the applicant farms produce more than 200,000kg MS a season, including 10% over 400,000kg MS.
There was a perception the tool would suit larger farms but the range of participating farm sizes showed that is not the case.
“It was great to see a lot of smaller farms participate as well as farms from right across the country.
“Ultimately, it’s not about winning or losing but about having a price you can bank on.
“The strong participation shows farmers appreciate having a tool that can help reduce their risk to milk price volatility.
“While most farms can operate in a volatile market, some farmers – maybe young or near retirement – can’t or aren’t willing to take on as much risk.”
If the co-operative can help them reduce their exposure and stay in the co-operative with no downside risk to other members it was a win-win.
“For those on the fence, I urge them to have a closer look at Fixed Milk Price and specifically how this tool is much improved over the previous guaranteed price programme.”
The fixed price was based on the average of the NZX milk futures settlement price on June 5, 6 and 7.
Farmers with a FMP agreement pay a service fee of 10c/kg for the contracted volume and will therefore receive $6.65 in payments spread in accordance with the advance rate schedule.
The service fee pays for the administration of the programme and Fonterra said it will have greater certainty on margins by locking in fixed contract prices with its customers.
Even if the milk price subsequently drops Fonterra will get the contract price for the dairy products and therefore the FMP scheme poses no risk to the co-operative and shareholders who do not participate.
Futures broker Nigel Brunel, principal of OMF, said the results of the first fixed milk price offering are encouraging for farmers, the industry and the practice of price hedging generally.
“Whether those farmers who took up FMPs would have used the milk price futures market remains to be seen.
“Futures are available every day while the fixed price offering will only be 10 times a year.”
NZX milk price futures for September 2020 settlement are trading at $6.75/kg MS and for the following season $6.70/kg MS.
