Hedging milk or selling a proportion of the milk produced on farm on the futures market will allow dairy farmers to avoid extreme milk price lows, according to FCStone’s Charlie Hyland.
The Commodity Risk Manager said that hedging milk removes some of the volatility associated with the global dairy markets.
Speaking at a recent risk management conference, Hyland said that dairy markets have grown increasing volatile, with product price swings of 10% seen during the 1990’s, up to current day price fluctuations of 50%.
Obviously everybody would like to get all the highs and avoid all the lows, but that is not realistic.
However, farmers who hedge will not receive a higher average milk price, but will instead miss both the extreme high and lows in the market, he said.
“When the market is at these extreme lows the farmers that hedge are getting a 50% higher milk price, because they manage that volatility.
“When the extreme high prices are happening, this is when everybody gets extremely confident and want to expand their business.
“But, everybody is doing it at the same time, so potentially people are buying land, new milking parlours and tractors at the most expensive time,” he said.
Hyland said the farmers who have hedged can’t do this because they are not getting those extremely high prices in the market.
“They have to operate their business in a more controlled and stable fashion, but the difference is when the market turns the farmers that have hedged are in a much stronger position.
They are in a position of strength when everybody else is in a position of weakness.
Hyland also said that farmers who have hedged can then expand when everything is cheap, because other farmers are in a crisis caused by the lower milk price.
What is the futures market?
The general idea of a futures market is just a market place where buyers and sellers meet to agree a price at some point in future, he said.
“The futures market doesn’t determine the price, it acts like an auction house or a mart where people just meet and negotiate what they expect prices to be some point in the future.
However, Hyland said that we do not have a liquid milk futures contract in Ireland or Europe, but they are available in the US.
There is no reason why we can’t develop a milk futures contract for Europe as well.
