Episode 30 – How can farmers use fixed milk prices to reduce risk?
Milk price makes up over 50% of risk in a dairy farm business, and increasingly more farmers are adopting milk hedging options to make their income less risky. Some 20-25% of dairy farmers and manufacturers are using milk hedging tools, but how do farmers find out where to start, and what the risks are?
Hear from experts on some key points to be aware of on various hedging options, and from a farmer who has been fixing his milk price for years.
Guests include:
- James Atkinson, Derivatives Sales Manager, NZX
- David Jensen, Bay of Plenty Farmer
- Brett Wooffindin, Director, Lawson Avery Limited
Hosts:
- Sheryl Haitana, Editor, Dairy Exporter
- Anne Lee, Deputy Editor, Dairy Exporter
NZX Derivatives Sales Manager James Atkinson says it takes time for those in the dairy space to develop and understand the tools they have, to manage the risks from milk pricing. He discusses the difference between Milk Price Futures and Milk Price Options, and the benefits and risks of both. He says these tools are generally harder to understand, so it’s been encouraging to see an uptake in the number of farmers using them.
Bay of Plenty farmer David and Lesly Jensen have been farming just over 700 cows on the family farm since 1992. He’s been fixing milk prices since Fonterra first offered it some time ago, and having spent time in the Northern Hemisphere observed that it’s very normal for farmers there to fix their biggest prices: milk and feed.
Their business also includes kiwifruit, which he says has far more fluctuation than pastoral farming, so fixing costs is a good way to minimise risk across the business.
Director of Lawson Avery Limited Brett Woofindin says rapidly rising interest rates caught a lot of people by surprise, and a lot didn’t have a chance to lock them in before they got too high. As a result, they’re seeing a lot of farmers struggling with the interest growing on their debt, and a lot are left floating. He discusses different strategies farmers can use to fix costs, to navigate these tough times as best suits their farm business.
He advises farmers to talk to their accountants or bankers about how best to manage risk within their business.
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