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Market Changes and Risk Management To Bring Stability

15 April 2013

UK - Milk market shake-ups are vital if dairy farms are to survive severe market fluctuations accompanied with the ‘total disdain’ received from processors.

This is the message of NFU Dairy Board Chairman, Mansel Raymond (Pictured) who stated that milk price rises in leading supermarkets have to be met by the middle ground of food service and retail.

A late spring has compounded forage headaches for many farmers already faced with bovine tuberculosis and cash flow issues. This has made being a dairy farmer in 2013 extremely tough.

But in his address to the NFU Dairy ‘Producer Representative’ Summit, Mr Raymond stated that global indicators show there is a ‘market scarcity in milk’ and demand will remain strong.

As factors combine to put dairy farms on the brink, scrutinising costs is more important than ever, according to Hugh Burton, a commodity trader at AB-Agri who offered insight in how producers can make market volatility work in their favour.

Mansel Raymond, NFU Dairy Board Chairman praised some supermarkets for price increases but stressed more work was needed in securing stability in the middle ground - food service and retail. Photo courtesy of Ceri Saunders

“By using ‘Raw Material Books’, you can develop a strategy on which commodity you need whether it be compound, straight or supplement,” said Mr Burton. “They allow the strategic purchasing of ingredients and then the ability to look forward at opportunities.”

“For example, take sugar beet pulp versus soya hulls. Currently soya hulls are £10-15 per ton more than sugar beet but this can change.”

Don’t be afraid to scrutinise your wheat buying, advised Mr Burton. Currently wheat distillers dried grains are £10/t higher than rape meal which is expected as wheat normally trades at a premium.

Mr Burton highlighted the £60 variation in wheat prices over the last 12 months, seeing a movement in wheat prices from £170/t to £230/t. This, he stressed, is the kind of volatility the market is experiencing.

Also highlighted as prone to shift in value were soya meal prices which can move 2 per cent on price for every 1 per cent movement on the exchange rate.

Summarising the outlook Mr Burton concluded: “Volatile markets are set to continue which means risk management is increasingly important, both to secure supply and your business.”

While many strategies can be exercised with great effect on-farm, further management tools can be found in the futures markets.

Liam Fenton, Managing Director of FC Stone Ltd, Ireland, introduced hedging in the dairy futures market as a method of spreading risk that could become more important in the future, should intervention leave the industry.

“Over the last few years the Butter and Cream markets have gone through volatile periods,” said Mr Fenton. “The boom and bust scenario has become more exaggerated.”

Selling forward can allow guaranteed prices long term with the stability being the watchword for Mr Fenton. Missing out on the market peaks is balanced by avoiding troughs in the market and appearing like a safer investment to lenders.

“If you can get an average you can plan better financially. You can show steady profits showing no boom and bust and investors will more be more likely to finance you.”

“It is not about matching, it is about margins and not who gets the highest price. If you buy futures, you should only be going long if you have sold forward, if you lose these roots there is a chance you will get burnt,” warned Mr Fenton.

But if the notion of milk in the futures market is going to work, it has to work throughout the chain, with the bottom line resting on farmers. Mr Fenton concluded saying FC Stone do expect the processors to get involved, who along with farmers, make up the sell side of the dairy market.

Michael Priestley

Michael Priestley
News Team - Editor

Mainly production and market stories on ruminants sector. Works closely with sustainability consultants at FAI Farms


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