Milk futures market unpopular after wild years

The enormous volatility in the dairy market in 2022 and its aftermath in the past year have not done the futures business any favors. As contradictory as it may sound, the risk hedging model was not resilient to market outcomes. Moreover, not all mediators seemed to have the right safety mechanisms built in.

More instruments
Dairy farmers who have taken part in futures trading have often made a lot of money. The practical reason is mainly that too little account has been taken of the fact that price risks can not only be at the bottom of the market, but also at the top. And perhaps the instruments were also too limited. Those who had set a price could only continue to look at the inevitable outcome.

Also costs more
In New Zealand, broader options are being explored and, in addition to the normal price fixing, they also want to introduce put and call options. This helps to make adjustments. The disadvantage is that it does increase the cost price.

Belgian and Dutch members of the MTC say they have lost large amounts in recent years because the milk price rose much higher than what was fixed on the futures market, which meant they had to pay extra. Dairy farmers in the United States and New Zealand have also had these experiences. It is one of the dangers of the futures market.

Act in the right context
The initial euphoria about the possibilities of the futures market may be over, but that does not mean that fixing the milk price can no longer offer advantages. Consultancy firm Baker Tilly in New Zealand indicates that hedging price risks on the futures market can be one tool in a broader mix of instruments, that its use must be carefully considered and that this may be best done through the milk processor or another large party, such as a bank, and with good supervision.

KUHdo
In Germany, this path is also broadly followed KUHdo app. This is a program from a young company in Kiel that makes it possible to fix the milk price for German dairy farmers. It currently appears to be one of the few of its kind in Western Europe that still offers these services and hedges market risks through futures contracts for skimmed milk powder and butter, where price developments are related to the Kieler Rohstoffwert. KUHdo operates in collaboration with dairy companies and other partners. The government is also participating. A cautious, restrained method of risk hedging is also chosen, preferably in larger contexts and clearly regulated.

Especially with the latter, a different approach is taken than MTC did. It operated, also according to its own statements, outside AFM supervision. That wouldn't be necessary. The Dutch and Belgian regulators are not allowed to respond directly to this, but their statements seem to point in a different direction.

European Parliament
Each report from the end of last year, commissioned by the European Parliament, also seems to have learned the lessons of recent years and is clearly less euphoric than previous government reports. It is perhaps even more cautious than the aforementioned Baker Tilly about the possibilities of the futures market. According to the authors, these possibilities exist, but they should not be overestimated. There are also clear risks. The study sees more in a fair, cost-covering milk price, which also takes into account sustainability requirements, among other things. Whether this option is also realistic is perhaps another question.

Fixed milk prices
A number of dairy companies still offer dairy farmers (sometimes in addition to the option of price hedging on the futures market) the opportunity to sell milk at a fixed price. Various companies have experimented with this in recent years. For example, the German DMK, French dairy companies and again this year with renewed efforts, the Irish dairy companies Tirlan, Kerry and Lakeland Dairies.

Boring and safer
This option is partly subject to the same restrictions as fixing the milk price on the futures market, albeit with less risk. Because fixed is fixed, but with a higher actual milk price only an extra earnings is missed and the missed amount does not have to be deducted from the intermediary. Moreover, only part of the milk volume can be sold at a fixed price.