The scheme, offering a fixed milk price of $7/kg milksolids (MS) for the current season, was over-subscribed when Fonterra called for applications last year.
A total of 328 farmers locked in 15 million kg MS although the strong interest at the time of applications meant individual allocations had to be scaled back to less than half of what had been requested.
The stellar rise in commodity prices has meant what looked like a great price at the outset of the season is now $1.30/kg MS behind the co-operative’s forecast and farmers locked into the scheme will be happy they didn’t get what they wished for.
The scheme also locked the GMP portion of their milk supply in to the opening advance schedule so cashflow on that portion has also been hit.
Fonterra chief financial officer Lukas Paravicini said a survey of farmers using the programme found that despite losing out on portion of milk supply most participating farmers stood by the scheme as it provided certainty, which was important going into the new season.
GMP was made possible by the existence of NZX’s Dairy Futures Market allowing Fonterra to lock in commodity milk prices through the exchange.
The irony for the stock exchange operator is that the presence of GMP itself creates added challenges to the development of a futures product targeting farmers directly.
NZX head of derivatives Kathryn Jaggard said although there’s no immediate plan to launch such a product there could still be a place for it.
If farmers were locked into a GMP price and then saw the farmgate milk price was likely to end up above that they could buy futures to hedge their position and actively manage their risk.
A new product would have to be developed for farmers using commodities currently traded on the futures market – whole milk powder and skim milk powder – as these go into the milk price calculation used by Fonterra.
Meanwhile, the continuing growth of Fonterra’s GlobalDairyTrade (GDT) and its recognition as a leading benchmark for global dairy prices is helping boost the relevance of the NZX Dairy Futures market even further.
GDT now has six other international companies selling product on the electronic auction platform alongside Fonterra, representing the United States, India, Europe and Australia.
The NZX Dairy Futures market cash settles to GDT and as companies on both the buying and selling side of the equation become more exposed to global dairy prices, GDT and the NZ-based futures market are fast becoming recognised as key tools in managing risk exposure to the often volatile international dairy price.
US exports are growing so that country’s exposure to global prices has increased and in Europe loosening of regulations and the convergence of the traded commodity dairy price there with global prices is also increasing the relevance of GDT and NZX Dairy Futures, Jaggard said.
It’s a trend that looks set to continue. The most significant catalyst for growth of the NZX Dairy Futures market was the February announcement that NZX is now registered as a foreign board of trade by the American regulatory agency, the Commodity Futures Trading Commission.
Jaggard said US companies might have previously found it difficult to participate in the Dairy Futures market because they had to first get through a somewhat daunting level of red tape and come to the market through foreign qualifying brokers.
All the US firms that have existing accounts with US dairy brokers now have instant easy access to our market, she said. That’s expected to bring new participants and increased liquidity to the market.
The market’s future price curve is already being used by analysts to give insight into industry participants’ expectations for pricing further out.
