Price Hedging Options Expand

As the demand for price hedging to manage volatility grows, Fonterra has expanded its Price Risk Management services to offer farmers greater flexibility in managing milk price volatility. Words Sheryl Haitana.

In Agribusiness6 Minutes

As farm costs increase, the demand for price hedging to manage volatility is growing and Fonterra has responded by adding new Price Risk Management services for the 2025–26 season and 2026–27 season.

The new tools give Fonterra farmers more options to manage price volatility and greater control of their budgets. Farmers can now lock in a fixed price for the current and additional season, and also set a minimum price floor or establish a price range – a minimum and maximum price – for the current season.

This is one of many price risk management tools on the market. As demand for these tools has grown, Fonterra has received feedback from farmers wanting more options to manage milk price volatility according to their needs.

Fonterra Milk Supply Director Lisa Payne says the co-op has focused on making its tools simple and accessible to its farmers.

“Three new services will be introduced to complement the current Fixed Milk Price programme, aimed at giving Fonterra farmers more choice when managing the risk of a moving milk price,” says Lisa. “When the milk price is unpredictable, it is hard to budget, plan ahead and make decisions.”

The maximum total volume available will remain at 150 million kg milksolids (MS), or around 10% of the co-op’s total New Zealand milk collections. About 20% of the co-op’s farmers have used the Fixed Milk Price service and fixed 120 million kg MS of that allocated volume in the 2024–25 season.

Farmers can use any combination of the Price Risk Management services for up to 50% of their total estimated production for the 2025–26 season. Farmers can fix up to 30% for the additional season; if they do, they will only be able to fix another 20% of their milk volume for that current season using the other price tools. A service fee is deducted in two installments from the January and February milk statements.

The ability to lock in a Fixed Milk Price for an additional season will enable farmers to secure a fixed price for a portion of their milk for two seasons, providing greater price certainty over a longer period.

“A big part of why Fonterra has stepped into this space is to help our farmers manage volatility and bring more certainty into their revenue.”

That longer duration comes with the higher fee of 13 cents per kg MS for the additional season, also deducted in January and February in the season the milk is supplied.

The ability to lock in a Minimum Milk Price for the current season will enable farmers to secure a minimum price (or ‘floor’) for a portion of their milk. It’s designed to protect farmers from any decrease below the set minimum while ensuring they benefit from any increases to the forecast Farmgate Milk Price.

“A big part of why Fonterra has stepped into this space is to help our farmers manage volatility and bring more certainty into their revenue.” – Lisa Payne, Fonterra Milk Supply Director

The Minimum Milk Price service will be set at 50 cents or lower than the Fixed Milk Price. This acts as an insurance to farmers to give them certainty their milk price won’t go lower than the price floor, but they retain the upside benefit if the milk price is higher. This service will have a Premium Fee which will be variable, calculated at each application event, dependent on the volatility in the market, and the timeframe to the final milk price.

The other new option is the Milk Price Range service which provides a floor and a ceiling – the ability to lock in a minimum and maximum milk price for the current season. This will enable farmers to secure both a minimum price and a maximum price (or ‘cap’) for a portion of their milk, helping them to stabilise their income within a range that they’re comfortable with.

Expanding the price risk management services benefits the whole co-operative, Lisa says.

“When we can lock in set prices for a portion of our milk supply, we can offer price risk management solutions to key customers that value price certainty for the products they buy from us,” says Lisa. “These solutions are often a key reason customers choose Fonterra as a supplier over other companies, and the premiums earned flow through as improved earnings.”