Forward milk contracts

[deleted user 837354]

I note from the yellow peril I fished out of the bin recently that one buyer is offering forward milk contracts for 3 years at a set price- I presume this is linked to a supply deal of finished product to a retailer at some stage. Anyway, going from memory the set price was 28 pence a litre but you could only do a maximum 50% of your anticipated litre-age.

This is an interesting step in the way of things for dairy, but perhaps the terms of the contract in question are not that exciting.

My question to you chaps then: if you could sell 100% of your production for the next 3 years at a guaranteed price, what specific contract terms would you be looking for?

This would give you the ability to fix a lot of costs (ie feed, vets, possibly contracting?) and also give you a degree of certainty in an otherwise highly volatile marketplace. As I may have written before, certainty is often worth money in business.

 

[Bald Rick]

Personally I think forward/futures contracts are the best tool to combat volatility.
We forward buy a lot of inputs - esp feed stuffs - on 6-12 months contracts to enable us to accurately budget
However dairies appear very reluctant to offer these with the outstanding exceptions being Glanbia Ireland (but you had to buy your inputs through them) and Yew Tree who enter into forward contracts with their powder buyers so they know what they can offer the farmer.
I would happily lock in 60% - even go to 100% if the money was right - but to a max of 24 months and happier at 12

 

[jimmer]

I don't trust them to pay me a decent price on the remaining litres

 

[som farmer]

I note from the yellow peril I fished out of the bin recently that one buyer is offering forward milk contracts for 3 years at a set price- I presume this is linked to a supply deal of finished product to a retailer at some stage. Anyway, going from memory the set price was 28 pence a litre but you could only do a maximum 50% of your anticipated litre-age.

This is an interesting step in the way of things for dairy, but perhaps the terms of the contract in question are not that exciting.

My question to you chaps then: if you could sell 100% of your production for the next 3 years at a guaranteed price, what specific contract terms would you be looking for?

This would give you the ability to fix a lot of costs (ie feed, vets, possibly contracting?) and also give you a degree of certainty in an otherwise highly volatile marketplace. As I may have written before, certainty is often worth money in business.

wkye farms ? We were discussing this at our yearly accountants meeting, his view, in principle, it's a good idea, and definitely something to consider, but at the present time, his opinion was that, the companies only promoted it, when they could see prices rising in the offered period. But definitely something to watch, and would be commonplace, when the 'details, and terms' were properly sorted out.

 

[Blue.]

I did 100% of my anticipated litres,basically you have to supply what you agree.

 

[Jamer]

I don't trust them to pay me a decent price on the remaining litres

The buyers can only pull that stunt once though. If long-term relationships are going to be built then trust is what they will have to be built on.

 

[som farmer]

that's a hell of a gamble

 

[Dave79]

A lot of dairies in Ireland, north and south are doing this. But only 10% of production per fixed price contract. Currently have one at 29p and 27p, for a total of 20% of production, but crucially we still get all hygiene and quality bonuses on top, so it’s our base price for those litres. Back when the milk price was terrible they offered one at 21p but that’s too low. The length of the contract varies from 12 months to 27 months. We are told it is to cover specific contracts with specific buyers.

 

[som farmer]

The buyers can only pull that stunt once though. If long-term relationships are going to be built then trust is what they will have to be built on.

and that is what will happen, and then a proper scheme will be offered. At the moment, processors are being hammered on price, by the retailers, who then hammer us, when/if a sensible pricing between those two, occurs. Then this will be a normal thing, giving us the opportunity to have some control of future income. I think everybody would agree, that at the moment, milk marketing is disfunctional. and hench our accountants remarks !!

 

[deleted user 837354]

wkye farms ? We were discussing this at our yearly accountants meeting, his view, in principle, it's a good idea, and definitely something to consider, but at the present time, his opinion was that, the companies only promoted it, when they could see prices rising in the offered period. But definitely something to watch, and would be commonplace, when the 'details, and terms' were properly sorted out.

Yes, I think that is who the article mentioned.

I can see how it would be attractive for people, but wonder why you can only supply 50%? Surely they know they have a requirement for X litres over the next 3 years, it thus makes no odds to them as processors whether 4 farmers supplied the lot or 400? In short, once they are 'sold' they are sold?

It is moving a bit more toward how futures or supply contracts work for grain. You agree to sell so many litres a month for a set price for a determined period.

 

[deleted user 837354]

I did 100% of my anticipated litres,basically you have to supply what you agree.

I presume this is with another buyer?

So you agree to send 100,000 litres a month, for example. And you will are guaranteed to be paid a base price for a given period. What happens to any surplus litres, paid for on spot prices, if of course they actually want the stuff?

The rolling problem is TB, particularly in our area. It's literally a game of chance for many people how many cows they will be milking after the repeated 60 day game of roulette.

 

[Llmmm]

I don't trust them to pay me a decent price on the remaining litres

The trick with these contracts if you read the small print ive seen some is that if its oversubscribed after you signed up the percentage fixed will be reduced you will also be entering into a contract to supply the remaining litres and if there is a price collapse you will still have to produce these litres at a loss i wouldnt sign unless it was 100% of milk but i havent heard anyone offering this

 

[deleted user 837354]

The trick with these contracts if you read the small print ive seen some is that if its oversubscribed after you signed up the percentage fixed will be reduced you will also be entering into a contract to supply the remaining litres and if there is a price collapse you will still have to produce these litres at a loss i wouldnt sign unless it was 100% of milk but i havent heard anyone offering this

That being the case only a mug would sign it? Why would you be stuck with a company knowing they could shaft you for 50% of your volume on their own whim?

I don't understand why dairies want to mess people about. Offer people 100% supply if they want it, once the litres are secured, then stop accepting any more? It won't suit everyone but that is life.

 

[som farmer]

summing up, move carefully, with your eyes wide open !!!!

 

[Sid]

If you fix a percentage with one buyer why shouldn't you be allowed to see the rest somewhere else?

Is there any other business that has to sign 100% of its output to one buyer?

 

[Llmmm]

That being the case only a mug would sign it? Why would you be stuck with a company knowing they could shaft you for 50% of your volume on their own whim?

I don't understand why dairies want to mess people about. Offer people 100% supply if they want it, once the litres are secured, then stop accepting any more? It won't suit everyone but that is life.

Was speaking to a guy once who was offered 10% fixed he signed ot was oversubscribed i think he ended up around 5% luckily milk price was good

 

[it's not over]

I signed one for 10% of supplies 24months at 29p, I hoped to loose alot of money on this but unfortunately it was a winner

 

[Headless chicken]

i think going forward something needs to change and forward contracts could well be one of these things.

my personal observation the other day was the amount of milk tankers who pass my entrance on a regular basis that aren’t collecting my milk. As we go forward with carbon emission becoming more of an issue I wonder how long this madness will
Be allowed to continue for. I can see that with larger farms filling a full tanker it’s less of an issue but surely we’d be better off with an MMB style system again we all our contractors are done with them and its up to them to then sell on and arrange collections etc accordingly. As we see a bigger move away from liquid mill I suspect it could
Become a more feasible

 

[vantage]

The rolling problem is TB, particularly in our area. It's literally a game of chance for many people how many cows they will be milking after the repeated 60 day game of roulette.

Certainly the case in my part of the world.

i think going forward something needs to change and forward contracts could well be one of these things.

my personal observation the other day was the amount of milk tankers who pass my entrance on a regular basis that aren’t collecting my milk. As we go forward with carbon emission becoming more of an issue I wonder how long this madness will
Be allowed to continue for. I can see that with larger farms filling a full tanker it’s less of an issue but surely we’d be better off with an MMB style system again we all our contractors are done with them and its up to them to then sell on and arrange collections etc accordingly. As we see a bigger move away from liquid mill I suspect it could
Become a more feasible

Gregory collecting FM, ARLA and Meadow in the same, mostly artic tanker here now.

 

[kiwi pom]

Certainly the case in my part of the world.

Gregory collecting FM, ARLA and Meadow in the same, mostly artic tanker here now.

Crikey how does that work?
Traceability not an issue there?