What type of dairy farmer will benefit most from a forward price contract?
Published 25/01/2011 | 05:00
Are forward price contracts relevant in Ireland?
The requirement for hedging or forward contracting is very much dependant on the competitive position of the producer. This is best explained by the diagram (right).
The erratic red line represents a volatile milk price, while the broken lines represents the cost of production of three different producers.
So, which producers would best benefit from hedging milk price?
Hedging milk price will be of little benefit to this producer, since managing competitiveness is the issue here instead of risk. This producer will eventually be forced to exit dairy farming unless he/she improves competitiveness.
This producer will benefit from risk management on milk price. However, hedging of milk price will not improve his/her average milk price. If anything, it will slightly reduce it. But hedging would help this farmer cope better financially with periods of low milk price, such as that in 2009. In my view, price-risk management, or hedging of milk price, is best suited to this profile of producer.