Fixed Milk Price Contracts Are a Valuable Risk Management Tool, but Are Not for Everyone – O’leary

Commenting on the announcement this week by Lakeland and Aurivo of 3-year fixed milk price contracts for their suppliers, IFA National Dairy Chairman Sean O’Leary said that for farmers to have the option to fix the price for a portion of their production could be a very valuable way of managing volatile incomes.

This, he said, could be especially important for a farmer with relatively high financial commitments. However, he urged farmers to examine critically what is being offered to them before deciding whether to participate or not.

“The two schemes offer different price points over the same 36 months period for milk at 3.3% protein and 3.6% butterfat. Lakeland’s contract averages at 29.41c/l + VAT between a lower summer (28.46c/l + VAT) and higher winter price (30.36c/l + VAT). Aurivo’s offering is 31.78c/l + VAT across the full period. They also offer different volumes, with Lakeland suppliers able to fix 5 or 10% of their 2016 supplies, while Aurivo suppliers can fix up to 10% of their ongoing monthly supplies over the period of the contract. By comparison, the average of the Farmers’ Journal League for milk at 3.3% protein and 3.6% butterfat for the last 3 years todate was 27.5c/l + VAT, with a 5-year average just in excess of 30c/l + VAT,” Mr O’Leary said.

“This illustrates the complexity of those schemes, and some of the reasons why farmers need to analyse carefully whether it makes sense for them to participate. Are they comfortable with the price on offer, relative to current market prices and their own production costs, likely future developments – and these are obviously impossible to predict accurately over 3 years – and their own risk management strategy? Do they know that the price on offer will allow them cover their costs, and are they happy to take the risk that, for the volume they fix, the day-to-day market price may turn out to be better – or worse – than the fixed price being proposed by their co-op?” he added.

“IFA has urged co-ops to support farmers by providing them with optional risk management instruments such as fixed milk price schemes, and we welcome the initiatives taken by a rising number of co-ops, many supported in this by Ornua. However, we also urge farmers to first think very carefully and analytically to decide whether the fixed milk price schemes on offer from their co-ops suit their business,” Sean O’Leary concluded.

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