Farm Ireland

Thursday 27 July 2017

Crunch time for dairy contracts

Stakes are high for 25,000 Glanbia suppliers as they decide whether new forward price deals on offer are worth taking up

It's crunch time for 25,000 Glanbia suppliers who are eligible for the first ever forward price contracts to be offered to Irish dairy farmers.

Who should sign up?

Could these new contracts be the way of the future for dairy farmers?

Darragh McCullough got the views of Nuffield scholar Tadhg Buckley who has just completed a study which answered these questions.

What are forward-price dairy contracts?

These are agreements between a farmer and processor for the supply of a fixed amount of milk over a fixed period of time for a fixed price.

The processor is able to do this on the back of agreements with its customers or by selling future milk supplies on 'futures markets'.

To date, these futures markets have only existed in the USA, through an organisation called the Chicago Mercantile Exchange (CME).

It was established mainly at the behest of processors, rather than farmers, trying to reduce the volatility in the price of dairy inputs.

Futures markets in dairying are still small when compared to corn or soyabean markets.

It is estimated that as few as 2-3pc of US dairy producers actively use them to trade.

Some reasons put forward for this by Alan Linnebur, an agricultural agent with the University of Wisconsin, were as follows:

  • Lack of understanding of how hedging works;
  • Mistrust of futures markets -- this has been further fuelled by the recent global financial crisis;
  • Prefer to speculate -- farmers are afraid of missing out on periods of peak milk price.

As a result, many US dairy processors offer their milk suppliers forward contracts, similar to those that have been offered to Glanbia suppliers in the past month.

The advantages of forward contracts such as these are as follows:

  • Much easier to understand;
  • As producers are dealing directly with their processor, there is a higher level of trust;
  • More suited to smaller producers and family farm situations.

However, even with this option, forward contracting remains quite low in the US.

In all, it is estimated that as little as 20pc of US dairy producers use some form of price-risk management.

Tadhg Buckley is an agricultural specialist with AIB. His Nuffield study was sponsored by FBD

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