Farmers can lock in prices with contracts
For example, the farmer can lock in the price of wheat at planting time, with a contract agreement to deliver a certain tonnage of wheat to a specified place, on a certain date in the future, for a certain fixed price.
The farmer no longer worries about a low wheat price at harvest time, but also gives up the chance at making extra money from a high wheat price.
Similar “hedging” contracts offer dairy farmers some degree of certainty on future profit margins, enabling them to focus on developing their businesses rather than worrying about the market place.
A dairy farmer in the USA would typically hedge between 40% and 60% of his milk production, said commodities risk manager with Dublin-based FC Stone Commodity Services, John Lancaster, at the Dairy UK conference. So far in Europe, 15,000 tonnes of butter, 5,000t of skim powder and 1,000t of cheese had been “hedged”.
He said it was equally important for dairy farmers to look at hedging inputs such as feedstuffs, where price trends are equally volatile.
He said hedging contracts could benefit the whole EU dairy supply chain. They could enable co-ops and processors, to offer fixed milk prices to their farmer suppliers. And ingredient and retail buyers would prefer to do business with suppliers able to provide price stability (especially because dairy ingredients compete with other ingredients whose producers use hedging tools).
