Time for market forces in the dairy market

Dairy farmers are often dependent on the milk price of their processor. They are involved in a cooperative structure and have little say, but a futures market for raw milk may change that.

When the milk price is announced, the dairy farmer watches with resignation. It sounds crude, but it is what it is. The processor calculates its margin and adjusts the milk price accordingly. In principle, little can go wrong. In the worst case scenario, the suppliers will run, but that doesn't happen often.

Retroactivity
At many processors, the milk price is announced afterwards. At FrieslandCampina, the guaranteed price is estimated in advance based on what others pay. In case of an incorrect estimate, a correction will follow a month later. It would be fairer if it were settled retroactively. Now a producer is sometimes paid a month too low. With a large monthly supply, that saves a few thousand euros.

The German cartel service has questioned this system. It is problematic that producers are unable to switch between processors. The milk supply to the established order is self-evident, while growing processors don't get a chance. The fact that producers have an obligation to deliver, while the milk price is only determined after delivery, frustrates market forces. A processor builds in certainty in advance. Part of the products are sold through (semi-)annual contracts.

Coming of the futures market
With the arrival of a futures market for raw milk, producers will also have the opportunity to build in security, as is customary among potato growers. Until recently, pigs could also be hedged on the futures market. That market bled to death because slaughterhouses did not play the instrument.

This danger also lurks with milk. Processors do not hedge, but do correct their risks afterwards. In short: there is no equality between producer and processor. This is due to the much-praised cooperative structure. So the question is: should the regulator intervene, does the system function just fine, or will a futures market breathe new life into the dairy market?

This article was recently published in 'Zuivelmarkt De Analyze 2017'. Click here to still receive the magazine.

Wouter Job

Wouter Baan is editor-in-chief of Boerenbusiness and Food Business. He also closely follows the raw materials markets and focuses on animal proteins such as dairy and meat. He regularly interviews leaders from the agricultural sector and the food world.

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