Farmers gain insights on value of milk-price hedging

Brokerage FCStone, the IFA and other dairy leaders are encouraging Irish co-ops to look at price hedging options to protect farmers against price volatility.

The IFA seminar ‘Making Risk Management Work for Farmers’ in Co Laois featured talks on global commodities from FCStone, as well as a presentation from US dairy farmer Joe Thome on how 18 years of hedging prices delivered near parity in income in that time, plus stability to plan his business.

A 10-year US study by Dimensional Fund Advisors showed that those who hedged on dairy futures broke even over that time.

“Risk management is just another tool in the toolbox,” said Mr Thome.

“It is a big learning curve, but I managed to teach myself a lot of it through reading magazines, and my brokers at FCStone have been very helpful.”

In 1998, Mr Thome’s family farm, Red Ridge Dairy in Wisconsin, had 400 dairy cows.

Now managing a 1,300-cow herd with hugely increased average weights, his expansion coincided with his move into risk management.

Red Ridge is still a family farm.

IFA dairy chairman, Sean O’Leary, outlined how, over the last five years, first Glanbia, and then, with the help of Ornua, more co-ops have offered farmers fixed price contracts, which allow some farmers to receive over 30c per litre for some of their milk output.

Mr O’Leary said these contracts have helped farmers understand the concept of hedging — foregoing the highest prices, but avoiding the lowest.

However, fixed price contracts are difficult to deliver depending on market prices, he said.

“Fixed-price contracts must not be the only option available from industry: other forms of hedging or margin insurance instruments need to be developed, by industry and in conjunction with government and the EU,” said Mr O’Leary.


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