Thursday, November 30, 2023

Farmers eager to fix milk prices

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Fonterra’s fixed milk price of $6.32/kg for next season was massively over-subscribed in April and farmers who applied were allocated only 13% of their target quantities. The co-operative received 57.8 million kilos in applications for the 7.5m kg available from 756 farms or about 7.5% of the total farm shareholders.
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Uncertainties about the effects of covid-19 on world dairy markets and milk output from the main producers were behind farmers’s desire to lock in prices on at least some of next season’s volume.

The April offer was the second before the start of the 2021 season – the March offer was for a fixed milk price of $6.80 net of the 10c service fee.

Some 238 farms applied for 15m kg and were allocated 5m kg collectively and therefore each application was scaled back to 33%.

Following the April offer Fonterra’s Farm Source director Richard Allen said the significant oversubscriptions in consecutive months highlight the benefits of the financial tool for farmers.

The offer prices are derived from an average of the daily settlement price of the NZX Milk Price Futures contract for three days following the first GDT auction of the month.

That offer price is advised to all Fonterra farmers on Saturday morning and they have Monday and Tuesday to make applications.


The next application window is on May 11 and 12.

Preliminary forecasts by dairy analysts for next season’s farmgate milk price have ranged from $5.60 to $6.50/kg, a steep drop from what is expected to be an average of $7.30 this season.

As a result farmers swamped the March and April offers with applications, a complete turnaround in the short history of the scheme.

In the 2019 inaugural applications over seven months were collectively undersubscribed by a third of the offering.

Nonetheless, about 10% of Fonterra’s farmers used the scheme to fix high milk prices.

Last year the company made seven offerings of 15m each time and this year its offerings so far have been much reduced, being 5m and 7.5m respectively.

“We can only offer a certain amount based on our ability to offset this with forward contracts with customers,” Allen said.

That shows a reluctance by international customers to commit themselves to forward contracts at a time of great covid-19 uncertainty.

Under the FMP rules Fonterra is limited to 5% of its total collection or about 75m kg in a season of 10 monthly offerings, an average of 7.5m kg an offering.

Farmers can apply to fix up to 50% of their own anticipated seasonal production.

New Zealand farmers have also made good use of NZX milk price futures and options markets during the covid-19 months.

In mid January some prescient farmers locked more than 700 lots at $7.20 for the 2021 season.

From mid February the milk price futures offer prices started to fall and daily contract numbers increased, peaking at 349 lots on March 24.

The average number of contracts a day on the active trading days in the past month has been 147.

The market now sits at $6.10/kg settlement price, less the brokerage payable. 

A single contract or lot covers 6000kg milksolids so 25 contracts would be needed to fix the price over a season’s milk production of the average-sized dairy farm.

But most users fix only a portion of their season’s output.

The first two trades have been made on the 2022 season, of 50 and 14 lots at $6.30.

NZX analystics head Julia Jones said the use of FMPs and milk price futures and options by dairy farmers is heartening for the industry.

These products are complementary and give some certainty about future milk incomes.

“But please don’t spend your time worrying about what are just forecasts and put your energies into what you can control,” was her general advice to farmers.

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