News Dairy Analysis 2019
Fixed milk price: a must for producer and processor
The term 'risk management' is increasingly heard and louder in the dairy sector. Locking the milk price for a longer period of time can be a tool for applying risk management. René van 't Riet, consultant at DCA Group, talks about these price risks and how you can respond to them.
Van 't Riet has a history with the agricultural futures markets of Euronext and also worked for the Netherlands Authority for the Financial Markets (AFM). At Euronext he was responsible for, among other things, the futures markets of potatoes, pigs and piglets. Van 't Riet has been working at DCA Groep since the beginning of 2018, where he is responsible for consultancy and (dairy) quotations. He initiated and introduced the foil cheese listing for Gouda and Edam, which DCA-Markets has been publishing every week since this spring.
"Dairy farmers are exposed to numerous risks, which can be roughly divided into 5 categories: personal risk, political risk, price risk, production risk and financing risk. An industrial accident falls under a personal risk," explains Van 't Riet. "A political risk, for example a trade war, is much more difficult for a dairy farmer to manage. This does not alter the fact that it is a good idea to follow the news about that subject, so that you can respond to it left or right."
Price risks are increasing
"The end of the milk quota has given the European dairy market a different dynamic," concludes Van 't Riet. "Since then, dairy farmers have been able to produce indefinitely again, which has significantly increased the chance of an oversupply." Dutch dairy farmers have accelerated considerably after the quota, compared to other countries. In other countries, the increase in production was initially more moderate, although dairy farming in Poland continues to grow steadily. Irish dairy farmers have also grown considerably in the past year.
"The milk price has shown fluctuations since the quota was released", Van 't Riet knows. "The market is also expected to be volatile in the coming years. The payout prices can rise or fall by as much as €3 per 5 kilos in roughly 100 months." According to Van 't Riet, this makes it difficult for a dairy farmer to make a liquidity plan; especially with high repayment obligations, dairy farmers benefit from certainty. "It is sometimes thought that a dairy farmer who is a member of a cooperative runs a lower risk, but that is incorrect. A cooperative simply calculates the low dairy prices in the milk price."
Need for certainty
Dairy processors also need certainty, according to Van 't Riet. "The processors sometimes sell their products months in advance, while the milk price is determined from month to month. So at the time of sale, the processor does not yet know its purchase price, which creates a risk." As a solution for this 'mismatch', Van 't Riet points to a fixed milk price for a longer period (eg for a period of 1 year).
"Abroad, fixed milk prices are already on the rise," he points out. "In Belgium, Colruyt Group already offers a fixed milk price. This is €33,71 per 100 kilos for a period of 5 years and concerns a group of 450 dairy farmers." Irish dairy processor Kerry is also already offering a long-term price and several similar initiatives have also been launched in Germany. These solutions are most similar to the concept developed by DCA.
Van 't Riet thinks these tools could be very interesting for the Netherlands, although he estimates that dairy farmers will have to get used to the idea that they can benefit less from any price peaks. "I understand that idea well, but you also have to realize that not all liters have to be fixed at a fixed milk price. It is also possible to fix part of the milk production, so that repayment obligations are not jeopardized."
Receive the magazine in your letterbox
This abbreviated article is part of the 2019 dairy analysis. The subscribers of Milk and Feed Pro have recently received it. Would you also like to receive this magazine? then click here to become a subscriber and receive the magazine sent to you.
With a subscription you get access to all private articles, data and market information on Boerenbusiness. As a subscriber you also get free access to the National Economic Agricultural Congress and other interesting seminars and workshops. Curious about all the benefits? View our offer in the webshop.
Wouter Job
© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.