Fonterra announces a pilot scheme for about 200 suppliers to give them milk price certainty

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Fonterra is piloting a new ‘Guaranteed Milk Price’ (GMP) scheme that will provide farmers with the opportunity to have more certainty in their milk price.

The pilot will mean farmers can choose to lock in a milk price announced at the beginning of a season for up to 75 per cent of their milk supply.

Fonterra’s Managing Director of Group Optimisation and Supply Chain, Ian Palliser says the past few years have confirmed that volatility in commodity prices is here to stay.

“We recognise that every farming business is different. And while most farmers can live with the market volatility, there are times when some farmers would prefer more certainty as it would help them manage their own farming businesses,” Mr Palliser says.

Certainty

“Certainty can be particularly important for farmers at times when they are considering investing in new equipment, expanding or undertaking a new conversion. It’s a bit like having a fixed interest rate on your mortgage versus a floating rate."

"It enables you to know exactly where you stand with a percentage of your production and this can help with future planning."

“As well as providing farmers with the certainty they are looking for, GMP also has benefits for the Co-op. That’s because we know what a certain proportion of our milk will cost us for the season and this in turn provides us with another selling tool when talking to our customers, some of whom are also looking for price certainty."

“We have been talking to farmers and the Shareholders’ Council about the GMP concept and we’re now inviting farmers to take part in the pilot scheme that will run over the next season.”

The Co-op will run the pilot for the 2013/2014 season with interested farmers who will have a proportion of their production set at the opening milk price which will be announced in May.

Break fee, like mortgages

Like converting from a fixed to floating interest rate on a mortgage, there will be a break fee for any farmer who decides to revert back to the normal milk price system during the season.

Mr Palliser says that the pilot would ideally involve around 200 farmers throughout the country, at different stages of their farm operations and with varying herd sizes.

“We will monitor the pilot over the next season and provide feedback to all shareholders on the benefits and the risks and this way farmers can see if it is something that might suit them in the future.”

Reaction from Federated Farmers:

Fonterra Cooperative Group’s trial of a Guaranteed Milk Price (GMP) scheme comes with shareholders from tomorrow, being able to indicate how many economic rights they wish to sell to the Fonterra Shareholders’ Fund.

“Ten out of ten for Fonterra trying something new with its Guaranteed Milk Price,” says Willy Leferink, Federated Farmers Dairy Chairperson.

“In most seasons, excepting the global meltdown of 2008/9, I have the suspicion farmer- shareholders would have ended up being out of pocket if they had ‘fixed’ their payout at the season opening.

“Aside from one or two hiccups, we have generally seen forecasts rise towards a season’s end.

“Take the current 2012/13 season.  The opening forecast was in the $5.95-$6.05 range per kilogram of milk solids (kg/MS) but $6.12 kg/MS is looking more likely.  For the average herd under GMP that difference adds up to being between $7,500 and some $18,000.

“GMP is a risk management tool but it is seemingly one more for the cooperative than farmer-shareholders.  For farmers to fix intelligently, they would need to take into account seasonal weather outlooks here and overseas, global markets and what the dollar may do.

“In other words, the sorts of complex risk management farmers rely on the cooperative for and expressed through the forecast payout.  Federated Farmers would be concerned if GMP implied there was going to be less accurate forecasts going forward.

“On top of this announcement and from tomorrow, Fonterra’s farmer-shareholders will be able to sell their economic rights in up to a quarter of their production based “Wet” shares to the Fonterra Shareholders’ Fund, or FSF.

“As the FSF is currently trading at $7.81 per unit, farmers may be tempted to take the money seemingly on offer.  Doing that marks a shift in the cooperative’s ethos.  Yet farmer-shareholders also need to know that the price won’t be set until 16 May.

“The FSF unit price today may not be the farmer price come 16 May.  This is a big chunk of a Fonterra farmer-shareholder’s equity so they need to think long and hard before committing.

“Federated Farmers echoes Fonterra’s advice and that is to spend money on quality independent financial advice,” Mr Leferink concluded.