Similar to locking in part of your home mortgage at a fixed rate, Fixed Base Milk Price is a price risk management tool enabling farmers to lock in up to 70 per cent of their season’s milk at an agreed price, before the season starts.
Applications are now open until 7 May 2019, and are available to existing Fonterra farmers as well as prospective suppliers who want to supply Fonterra in the 2019/20 season.
Fonterra Australia’s General Manager Farm Source Matt Watt says Fixed Base Milk Price helps give suppliers greater certainty throughout the season by delivering a more stable income.
“The season we’ve just had has further highlighted the impact that variable input costs, such as feed and water, can have on a farmer’s ability to plan.
“Farmers have told us that they’re looking for flexible options that can help them to manage financial exposure, and that having price certainty from the beginning of the season will give them more confidence to invest in cost management opportunities, such as grain contracts,” says Matt.
Tunbridge farmer Richard Gardner milks 1,100 cows on his 2,400-hectare property in Tasmania’s midlands, and has used Fonterra’s Fixed Base Milk Price since its inception in 2014 after converting 340 hectares of his farm to dairy.
“Fixed Base Milk Price lets me know what price I am going to get for my milk at the beginning of the season, and it serves a fundamental business principle of taking the risk out of my business,” says Richard.
“I’ve come from a background of producing commodities such as wool and grain, where similar price risk management tools have been the standard for a long time, so for my dairy business it makes sense.
“By locking in 70 per cent of my season’s milk, I take the uncertainty out of our budget. I would lock in 100 per cent of my milk under the Fixed Base Milk Price if I could.
“Our two biggest challenges are seasonal conditions and milk price fluctuations. I use irrigation to take out the production risk and fixed milk pricing to take out the market risk,” says Richard.
Matt says that by coupling the Fixed Base Milk Price with other business management opportunities, suppliers can secure confidence in farm margins.
“By tendering a portion of their annual milk production at a price that makes sense to their business’ bottom line, they can take some of the stress out of the season,” says Matt.
“In addition to providing farmers with more price certainty, the Fixed Milk Price also provides Fonterra with certainty on the margins it can achieve on this milk.
“With the Australian milk pool forecast to decline further, being able to provide our customers with greater certainty in terms of product volumes will help to translate to greater returns back to the farmgate – so that’s a win-win for everyone,” concludes Matt.