Those selected for the Guaranteed Milk Price (GMP) pilot programme will lock in a $7 milk price for between 10% and 75% of their milk supply. Farmers will not only gain certainty around the final milk price they will also know when they will be paid. The advance schedule that is currently forecast for 2013/14 for all Fonterra supplies will apply to those in the GMP pilot. The difference being is that for GMP suppliers the payment schedule is locked in. Knowing how much and when payments can be expected in the coming year will be extremely helpful for managing cash flows.
The GMP provides a number of benefits to farmers, so it is not surprising that Fonterra received a high number of “expressions of interest”. How many of these transmit into actual applications is yet unknown as the cut off date for applications is not until 21 June. Fonterra are expecting that the bulk of applications won’t be received until nearer the cut off date. It is very likely that demand for this scheme will outstrip supply and some farmers will miss out. Fonterra are yet to determine the exact criteria they will use for selecting participants for the pilot programme.
Fonterra’s Director of Commodity Risk and Trading, Bruce Turner, says ideally they are looking for a broad base of farmers who are at different stages of their farm’s operations, have varying herd sizes and are located across the country. “The $7.00 GMP will allow farmers who require greater certainty for their farming business to better plan for the full farming year, knowing exactly how much money they will receive for a set portion of their milk supply.”
The main reason for Fonterra to run a pilot programme is to learn both how it can benefit farmers as well as assess any potential risks or downside. Therefore it is important that Fonterra tests this programme across a wide range of participants that are representative of the diverse range of suppliers that Fonterra has. This means testing how the programme suits various farming systems ie high versus low input systems and to test it across a wide geographical spread. Individual farmers will all have different attitudes to risk. So what looks good to one farmer by not necessarily be appealing to another.
The GMP is likely to have strong appeal to those farmers that have a real need for certainty regarding potential profits. This may apply to farms which have a high level of outside investment or are carrying high levels of debt.
Dairy farmers in Europe and the US have much greater certainty around milk prices that New Zealand (NZ) farmers do. In the US farmers typically “lock-in” their milk price, and often feed prices as well, which provides a great deal of financial certainty and security. New Zealand farmers are faced with the most volatile farm gate milk prices anywhere in the world. This is because the majority of NZ’s milk is manufactured into commodities which are sold on global markets and we do not have a large domestic market for liquid milk for which prices are typically a lot more stable. The development of GMP is a fantastic invention which may have as great an influence on the NZ dairy industry as the invention of electric fences and artificial insemination.
GMP may have as great an influence on the NZ dairy industry as the invention of the electric fence
GMP also allows Fonterra to provide more certainty to its clients. Fonterra knows what price it needs to sell milk powder at in order to return a $7 milk price. So this gives them an opportunity to lock in forward contracts for longer periods with buyers of milk powder. “The pilot programme also provides the Co-operative with strong certainty. This is because it allows us to lock in contracts with customers at a set price, so that we can make sure we have the right margins so there is no impact or risk if there is a fall in prices” says Bruce Turner.
There are also other tools Fonterra uses to manage their commodity price risk. One of these tools is the NZX Dairy Futures market. As this market continues to grow in both participant numbers and liquidity it becomes a more and more useful tool for dairy companies like Fonterra to manage their commodity price risks.
Fonterra have been regularly asked whether other dairy farmers will be subsidising those in the GMP programme should the farmgate milk price this season fall below $7. The GMP programme will essentially work outside of the factors that influence milk price. The milk supplied under the GMP programme fits within the portion of milk that is sold outside of the GlobalDairyTrade (GDT) auction system. The milk price is derived directly from the prices achieved on GDT. Therefore should Fonterra do an extremely poor job of managing the risk associated with offering the fixed milk price, then this would impact its profits and its dividends but not the farmgate milk price. Buyers of dairy commodities have strong demand for price certainty so existence of GMP will simply give the Fonterra risk management team another way of managing the risks the business is already exposed to, and won’t increase there risks.
Fonterra confirmed earlier today that the Guaranteed Milk Price in the 2013/14 season will definitely be the same as the opening milk price ie $7. In the longer term they have not ruled out the option of the GMP programme operating at a different price to the standard opening milk price. Demand for the GMP may be such that suppliers are willing to forgo a small amount eg 5c/kgMS in order to gain price certainty.
Fonterra hope to learn a lot from the pilot programme which will run this season. Farmers who participate in the programme will no doubt also gain valuable first hand information on how this new product may work for them.
More details about the GMP scheme can be downloaded here.
Any questions relating to the scheme should be directed to GMP@fonterra.com or keep and eye out for the GMP team at the national field-days.
