Fonterra farmers returned in numbers to the co-op’s Fixed Milk Price offer in May after turning up their noses at an unexpectedly low-priced offer in April.
The May offer, covering 10 million kilograms of milksolids at $8.49/kg, was reportedly oversubscribed, although Fonterra has not yet released the volume of applications and the scale-back percentage.
In contrast, farmers were not attracted by the $7.57 offer in April, when only 42 applications were made for a total of 1 million kg out of 10 million kg offered.
Back in March, the first offering for the 2024 dairy season, 302 applications oversubscribed the 15 million kg offering at $8.78.
In April farmers were not prepared to swallow the $1.20 price reduction, which was dictated by a shortlived but considerable slump in milk price futures traded prices (MKP24) at the time.
Futures trade prices have since recovered somewhat to sit around $8.45 and form the basis of the May Fixed Milk Price (FMP) offer.
The first and obvious conclusion of the 90% undersubscription for the April FMP is that farmers have a higher expectation of the farmgate milk price outlook.
They were not prepared to lock in a $7 figure before hearing what Fonterra’s first forecast would be in late May.
A consensus of predictions is not available from the dairy analysts, who currently range from $7 to $10 in their forecasts.
“Most farmers were not prepared to lock in an FMP price that was lower than their break-even,” Jarden’s head of derivatives, Mike McIntyre, said.
“Milk price futures have quite rapidly appreciated since that early April slump, which was an over-reaction at the time.”
Fonterra said it is not uncommon to see swings in participation for FMP events.
For the 10 monthly offerings in the 2023 milk season, from March 2022 to December 2022, applications varied from 35 (December) to 2021 (June).
Not unexpectedly, the June FMP offer price was $10.34 and the December offer was a season-low $8.96. Both prices have a 10c fee deducted before payment to farmers.
The second conclusion is that FMP participation is very sensitive to the offer price.
Five hundred-plus applications were received in six of the seven months last year in which the offer price was $9 or $10.
The three low-participation months, August, November and December, had offer prices in the high $8.
The true test of the FMP scheme as a risk management tool for farmers is participation in March, April and May, before Fonterra’s own informed forecast is known.
These are called the pre-season FMP events.
In autumn last year more than 1300 applications were made while the offer prices were $9.38 to $9.77 and all applicants had their volumes scaled back.
A third conclusion is that 2022 was a great year to use Fixed Milk Prices.
All 10 monthly net offer prices (with 10c deducted) are going to finish higher than the likely 2023 payout, currently in the range $8.00 to $8.60.
Using the $8.30 mid-point of the Fonterra forecast, FMP users stand to gain between 56c and $1.94/kg.
McIntyre agreed that 2022-23 has been a great season for farmers to use FMP contracts and to have sold milk price future contracts.
“However, the aim is not to pick tops and bottoms, but to lock in prices that cover your costs and give you a margin.
“There will be unders and overs but the whole idea is risk management to ensure an adequate return on the capital invested in farming.”
Last year 6002 applications were received in total and Fonterra sold 86 million kg on FMP contracts.
The volume sold was about 5% of Fonterra’s total milk collection for the season.
FMP offer prices are an average of the daily settlement prices of MKPU24 futures contracts over three days following the first Global Dairy Trade event of the month.