Fixed milk price on the rise

The southern German dairy cooperative Hohenloher Molkerei launched a system in April 2019 whereby suppliers can fix the milk price in advance. The system of a fixed milk price is also emerging in neighboring countries. 

With this system, dairy farmers are offered the opportunity to respond to the prices Hohenloher offers for the coming 12 months during a certain period of the month. The auction period is always held in the third week of the month and the fixed prices are based on the forward rates for butter and skimmed milk powder on the European Energy Exchange (EEX) in Leipzig. The dairy farmer can also decide whether or not he/she participates and for which part of his production.

Starting immediately
The system is therefore completely next to the normal milk price that is paid by the cooperative every month, which means that the milk flows do not change. The dairy farmer must assess for himself whether these prices are favourable; He/She does not participate in any way in trading on the futures market and does not have to take this into account or have any knowledge of it. Participation is possible from 10.000 kilos per delivery month. For now, a maximum of 30% of the total monthly production applies.

Hohenloher Molkerei wants to start with the system immediately. The advantage for dairy farmers is the certainty they create about their turnover and cash flow in the future. This also applies to Hohenloher Molkerei, which, as a dairy company, has more certainty about the purchase price in the coming months. This allows the sales department to calculate more sharply and with less risk.

System on the rise
The system of a fixed milk price is also emerging in neighboring countries. In Belgium, for example, Colruyt Group offers dairy farmers a fixed milk price for part of their production for a period of 5 years. In the Netherlands, too, fixing milk prices is increasingly discussed. 

"Setting prices for a longer period of time is an important part of risk management. Certainty about returns means lower risk. In other words: fewer peaks and fewer dips", reports René van 't Riet, risk management expert at DCA Group. "This applies to both the buyer and the supplier. Experience shows that dairy farmers have to get used to the fact that they can benefit less from the price peaks."

According to van 't Riet, good guidance and training as well as price and market information are essential for dairy farmers. "DCA also experienced this when we introduced such a contract to the potato market in 2007. We are now paying special attention to this when rolling out in the milk, feed and pig markets."

Wouter Job

Wouter Baan is editor-in-chief of Boerenbusiness. He also focuses on dairy, pig and meat markets. He also follows (business) developments within agribusiness and interviews CEOs and policymakers.

w.baan@boerenbusiness. Nl

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