NEWS
Fonterra’s FMP proves popular By Gerald Piddock
F
onterra’s fixed milk price (FMP) scheme is a great tool for protection from the historic volatility seen in dairy prices. But people need to still do their homework and talk to their financial advisors before signing up to it, farmers were told during an online presentation organised by the Smaller Milk and Supply Herds group. The tool allows farmers to ‘fix’ up to 50% of their estimated production for the season at a set price, starting from March through to December, Fonterra innovation manager Satwant Singh says. They could fix all of that in one event or smaller amounts throughout the season. “The important bit is to make sure you do your homework and talk to your financial advisor before you participate,” Singh says. She says there has been an increase in farmers using fixed milk pricing with over 1600 signing up. “That’s around 18% of our farms which have locked in some portion of their milk price this season,” she says. It was a huge amount, but it had been a rollercoaster of a season. Waikato farmer Gaynor Tierney used fixed milk pricing for the first time this season. The uncertainty around the covid-19 pandemic, the unease around the direction of the milk price and a new farm purchase led to their decision to fix 30% of their milk price. She says they wanted a level of stability in their business. “We were really trying to cover our downside risk. We calculated with the new property and our income coming in from the dairy farm that we really wanted to have a $6/kg MS milk price and we wanted to make that as stable as possible for us,” Tierney says.
DAIRY FARMER
February 2021
More than 1600, or about 18%, of farmers have signed up to Fonterra’s fixed milk price scheme.
Some banks had predicted a $5.40 milk price for the season and fixing the price offset that risk. With the benefit of hindsight, Tierney says they probably would not have locked in the price at $6, given how the price had lifted steadily over the course of the season. Waikato accountant Nigel McWilliam described it as a downside risk protection tool for farmers, rather than a tool for gaining a high milk price. It was a futures contract where a buyer and seller make a delivery of a product at an agreed date, but the price is decided beforehand. “The whole point of it is to protect you against price volatility,” McWilliam says. While the milk price had been largely settled over the past few seasons, there was no guarantee that would continue into the future. “If there are any jitters in the market, that’s where you start to look at fixed milk pricing,” he says. It was done to offset the chance of the milk price losing value over the duration of the season. Examples of this occurring in previous years are when farmers were told there would be a $7/kg MS payout and it fell to $3.90. “The key to it is protection from loss. If you enter a fixed milk price from that mindset, it’s a tool you can use,” he says. It took 15 months for dairy farmers to get paid for the milk collected over
“The whole point of it is to protect you against price volatility.” Nigel McWilliam the course of a season. Over the course of that period, farmers had to consider climate risk, currency volatility, trade restrictions, the ongoing impacts of the pandemic as well as internal risks such as on-farm costs. “From a risk perspective, things are pretty high when you really drill into it, so hence the need to think about fixed milk pricing,” he says. McWilliam says it was also a useful tool for those farmers in a high debt situation. “Approach it like that, then there’s no regret, so if you do go below the market, at least you know you can cover your breakeven milk price and avoid financial distress later,” he says. For farmers with moderate debt levels, it would likely increase the support received from banks. “You just get greater confidence with your interest rate. We have certainly noticed that with those who have engaged with FMP,” he says. “The credit pressure’s come off and they have saved money on the expense side, rather than worrying about what they have locked in on the income side.” n
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