Our view on risk management for milk processors (2021)

Challenges in dairy production

You’ve probably seen the headlines: farming is a topic of discussion all over the globe. Dairy knows its challenges, but the shift to plant based products is taking its toll on the world’s resources as well. There are a lot of resources needed for dairy production, but when executed well, dairy is a great source of protein and fat. There’s no machine or laboratory that can turn grass into something so versatile.

These discussions about the environmental impact on farming often lead to restrictive measures. In the Netherlands, the phosphate cap was a bitter pill to swallow for farmers who had just invested in more capacity and a growing milkflow. Fixed cost increase, without the space in variable returns to compensate for that. It’s becoming harder and harder to make a decent living as a (dairy) farmer. Even Jeremy Clarkson didn’t manage to monetize his land in the Cotswolds! (Clarkson’s farm @ Amazon prime, must see!)

Dairy cooperatives, as well as private milk processors have a large responsibility in this. The farmer is providing the world with nutritious food ingredients and should be paid well for that. In order to achieve a good, sustainable farmgate price, milk processors need to make sure they can valorize milk in different product streams and achieve market-conform prices for these products. The more options, the better the valorization, typically.

Volatility in milk returns

We have seen huge volatility in dairy commodity prices, as well as farmgate prices over the last 5 years. But the value chain is not looking for volatility, the chain is looking for sustainability. New financial regulations also require a more sustainable and forecasted cash flow to get financing for the operation. Farmers need to be able to forecast and hedge their milk price.

Milk processors and farmers need to become more like traders. Don’t ride the wave of volatility, but let it work for you. Nowadays, there are many liquid and well-correlated instruments to hedge end products such as butter, cheese, powders and raw milk. Using these derivatives can help you secure your price for future sales of your end product, or future purchases of your raw materials. 

Managing basis risk; market access!

But you’re not there yet, there’s still something called basis risk. When you have hedged your sales, you need to make sure to sell the physical products at market prices. For example, you have hedged your SMP sale forward at EUR 2600/mt and the settlement is at EUR 2500/mt. You have locked in a nice return of EUR 100/mt, but only if you sell your physical powder at EUR 2500! That’s why you need the best market access. The larger the group of buyers you can reach, the better the price you can achieve. 

And that’s where we come in. You can focus on production while providing sustainable prices to your farmers. You no longer have to worry about selling your products at the right price.

OpenDairy provides you with direct access to a buyer base located all over the world. So you can always find that one customer, willing to pay the optimal price for your product!