SPECIAL REPORT: BUILDING A PORTFOLIO
Smoothing the milk price ride Milk futures are becoming part of farmers’ business portfolios. How do you get in on the action? Karen Trebilcock reports.
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ou can’t control the weather, you can’t control when your best heifer is going to calve to make sure her calf gets up on its feet and you can’t control whether your 2IC is going to last the spring but you can control the price you get for your milk. It’s called hedging. Futures, options and derivatives is all jargon focussed on locking in your milk price for part or all of your production for this season or for several. Farmers in North America have been doing it for years as an integral part of their business for almost whatever they grow but it has only been available in New Zealand for the past five years. And it’s only available for dairy. Traded on the NZX, in units of 6000kg MS for this season and the following two, milk futures are becoming part of many farmers business portfolios with about 10% of the nation’s 2020 – 2021 season production hedged. Jarden vice president, derivatives Harry Hewitt said corporate farmers were among the first to use hedging but recently smaller, family-owned farms were also using the tools. “It starts with setting out your goals for your future. It might be debt reduction, or a new centre pivot or simply targeting a $1.50 profit per kg milk solid. “Milk price volatility is a financial risk to achieving that goal so if you can take that volatility out of the equation, it helps you to plan.” He said farmers shouldn’t think about whether milk prices were rising or falling and only sell futures when they suspected prices would fall. “It’s a crude analogy but it’s like buying fire protection insurance for your house. You don’t do it because you
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believe your house is going to burn down. You do it because if your house does burn down, you’ll be able to replace it.” He said hedging allowed farmers to continue managing their businesses the way they wanted to even if the price of milk solids fell. Deciding how much production to hedge Jarden vice president, should be part of their derivatives Harry Hewitt discussions with bankers, accountants and farm advisors and it was then a futures broker would be brought in. “Everyone should be included in the conversation, so the farmer and all of the stakeholders are on the same page. “Also, it should be part of the discussion at the end of the season. How did it go? Did it achieve what you wanted it to achieve? “Farmers are using it for succession planning as well. It can help them to ease out of a farm while knowing it will still continue to operate in an efficient manner during that process. “You can buy back your hedges at any point through the season, so if a farmer finds themself in a position where they want to reduce their hedged position, they have the flexibility to unwind all or part of their hedge at any time.”
