An Irish college has devised a groundbreaking course to help the multibillion-euro Irish dairy industry use complex stock market instruments to manage price risk in the highly volatile global market.
Cork Institute of Technology (CIT) has teamed up with a leading commodities firm, INTL FCStone, to host the week-long event — the first of its kind in Europe — on the use of dairy futures and financial derivatives.
It has attracted interest from top co-op executives from Ireland, Europe, and even New Zealand — one of Ireland’s main dairy competitors — who are expected to attend the course in CIT early next month.
Agriculture Minister Michael Creed hailed the collaboration between academia and industry saying in the post quota era, it had become clear volatility in the marketplace was something the dairy industry was going to have to live with. “Anything that helps the industry manage that volatility will ultimately help farmers,” he added. “I am really excited by what I’ve seen here [at CIT] and it could become a global leader.”
Price volatility in the EU dairy markets has increased significantly in recent years following a shift in EU price support mechanisms and the increased globalisation of the dairy industry.
The industry has seen average monthly price fluctuations move from about 5% in the mid-2000s to about 10% or 15% today. Butter alone, which was trading at five-year lows of around €2,400 a tonne four months ago, is now trading at around €4,000 a tonne.
Declan O’Connor, lecturer in CIT’s department of mathematics, said this level of price volatility has made risk management more difficult for the industry.
However, he said dairy futures markets and other financial derivatives, which were developed in 2010 to help the industry manage this price risk more effectively, are not as widely used in the European markets as they should be and the CIT course aims to change that.
“The main problems the industry faces are cashflow problems, planning and budgeting problems. These futures will allow them to lock-in prices, so that when they go back to their boards, they are not showing huge variance in prices,” he said.
Liam Fenton, MD of INTL FCStone Europe said: “If the dairy industry has the capability to manage that price risk element, like the BPs and Shells do in the oil industry, it allows you to get on with what you’re good at — growing grass, calving the cows, proper herd management. It gives you certainty, that is what farmers want.”
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