Accepting Price Volatility or Managing for Price Stability is a Choice

NZ dairy farmers are directly exposed to uncertainty and fluctuations in commodity pricing. Over the past ten years external factors have had a significant impact on dairy farming businesses, leading to increased financial pressure, delayed investment plans and solvency issues.

New Zealand (NZ) dairy farmers have been left behind. Sophisticated and diverse price risk management (PRM) tools are available to our competitor farmers in the USA and Europe. This will impact NZ's industries competitive advantage on the global market in the years to come. Farmers need to be prepared with a plan and strategies to manage price risk.

PRM tools are well advanced and diverse for farmers in parts of Europe and USA compared to tools available to NZ farmers. These tools vary from simple forward fixed prices in Europe to a variety of flexible hedging tools in USA. Processors, milk marketing companies, cooperatives, and/or financial brokers provide ease of accessibility to the tools and in depth information to help farmers utilise the tools, thus providing key competitive countries with an advantage.

These PRM solutions enable farmers to transfer the price risk to someone else via a processor or a futures exchange and experience the benefits of a stable profit margin. The choice to have stable or volatile profit margins has provided some farmers with different advantages. These include enabling new farmers to enter the industry with confidence, helping some farmers to grow their businesses with certainty and others to have the ability to manage debt and achieve their goals.

The introduction of PRM tools is relatively new to the NZ dairy scene and options are not readily available. PRM is a developing area and the availability and flexibility of the tools will depend on farmers understanding of the tools, demand for the tools and adoption of PRM. Further support by the industry is essential. Areas of support include more PRM tools, risk management decision making tools, margin calculators and or information that will help farmers understand their price risk and make an informed PRM plan suitable for their individual situation.