A SYSTEM of dairy 'futures' could be the salvation of the UK dairy industry, as they would help manage the volatility that has become the norm for the sector.
That was the call from Welsh National Farmers Union president Meurig Raymond as he opened the union’s dairy risk management conference in Solihull this week. Mr Raymond, a dairy farmer with 620 cows in Pembrokeshire, told delegates that the potential benefits of dairy futures could be worth exploring while the industry recovers from the last market downturn.
Future contracts are standardised, legally binding agreements to buy or sell a specific product in the future. The buyer and seller agree on a price today for a product to be delivered or settled in cash at a future date, with the contract specifying the quantity and quality of the goods, and the time and location of delivery and payment.
Applied to dairy markets, futures would allow producers and manufacturers to limit their price risks – as such markets attract traders who are willing to accept take on risk, in return for potential profits.
Mr Raymond said: “I am all too aware of the difficulties the dairy sector has faced as a result of low farm gate prices over the past few years. This needs to be addressed quickly to develop more resilient, forward looking supply chains.
“We want to see increased use and uptake of innovative, new tools that help balance the price risk between farmer, processor and end user – and dairy futures could be one answer," he proposed.
“In the US, they are playing a part in aiding price discovery and collaborative working across the supply chain and I believe futures provide an opportunity for both the UK and more broadly for Europe. A processor and manufacturer are afforded the capability to hedge their market risk, locking in a longer term price for a commodity, be it skimmed milk powder, butter or cheese," he explained.
Participating farmers may also in turn be presented with the opportunity to lock in over longer periods a proportion of their milk at a price agreed with the processor, providing greater stability, certainty and in turn promoting confidence in the sector, allowing dairy farmers to invest in their businesses in the future.
“Futures also provide greater transparency around market expectations over the medium term," said Mr Raymond. "This enables the supply chain to plan ahead, manage production and ultimately mitigate the risk presented by the peaks and troughs of supply.
“Transparency with it carries many benefits – it aids price discovery, allowing different marketing arrangements to develop, such as market-linked formula pricing and forward contracts.
“Dairy Futures are a new concept," he conceded. "As such we have much work to do in developing our knowledge and capacity as an industry to understand how to best utilise this vital tool.”