Futures were a risk management tool that could be used in the dairy industry, but farmers needed to be significantly educated in how it all worked before going down that path, Australian Dairy Farmers acting president David Basham said.
“Just blindly entering into it would be dangerous,” he said.
He said using futures would work best at a processor level as they already hedged currency so this would be something else they could use to manage their risk.
Farmers would need to understand this would remove fluctuations - meaning they would miss the extremely low prices but also the extremely high prices.
Mr Basham said farmers already took this approach with interest rates so he wasn’t sure why they could not do it with milk price.
“Every time we renew loans, we are offered some future pricing on our interest rates, and we can lock in none and ride the variable rate or we can lock in for two years, four years whatever and choose what we think is good for our business,” he said.
“We need to get to understand our business and what risk we are exposed to.
“If we can sign a contract that locks in our milk price at a certain range, we should then go and lock in grain price at a sustainable price and then we know our business is protected from two of our biggest impacts on our returns.”
Mr Basham said price volatility had led to increased debt in the industry.
“I think there’s been a lot of people who have increased debt to manage cash-flow over the last 10 years because there have been significant impacts to the business,” he said.
“The problem is it is easy to borrow, but hard to pay back."
The servicing of that debt increased stress levels when prices fell.
“I think every individual has different levels of comfort with debt,” Mr Basham said.
“But (some) others are reaching levels where the banks are not prepared to go much further and that becomes much harder.”
It was vital for the industry to start having conversations with processors about how to put actions and information to farmers to help them to manage risks.
“I think it is very much about encouraging them to put different options in front of farmers,” he said.
For example, a fixed price structure, which some of the companies offered in some states, would remove the highs and lows for farmers but would also mean they processor carried some of the risk.
Processors also needed to be clearer in their pricing announcements.
Mr Basham said some of announcements in the past month were confusing and didn’t clearly explain the price different suppliers would receive.
“I think (the complexity of pricing systems) is done for several different reasons,” he said.
“One is to try and send some market signals of what processors want from farmers and some of arrangements are to make sure supply is secure for a longer period of time.”
Mr Basham said farmers needed to get incomes estimates from processors and not rely on public messaging about milk prices.