Farmers have three common tools to manage price risk: Fixed Price, Futures, and Puts. Here’s how they compare:
- Fixed Price Agreements
How it works: Between March and December, Fonterra allows you to lock in a set price for your milk solids in advance. This price is based on the market at the time of offering, and you can apply to fix a portion of your supply.
Pros: Fixed price agreements are simple and provide certainty. Your income is guaranteed at the agreed price.
Cons: You don’t get to choose the price, it’s set by Fonterra. There’s also a 10-cent service fee per kgMS, and you won’t benefit if market prices rise above the fixed price.
- Futures Contracts
How it works: A futures contract is an agreement to lock in a price for your milk solids at a future date. You pay a deposit upfront (called the initial margin) to secure the contract. If the market price drops below your agreed price, you receive payments to cover the difference. If the market price rises above your agreed price, you’ll need to pay the difference. At the end of the contract, the final payment settles the difference between the market price and your agreed price.
ProsS: Futures allow you to fix your milk price for a given season. The upfront cost may be lower than it would be if put options were used, which means there is less immediate cash outlay.
Cons: Futures fix your milk price for the given season, meaning if the market rises above the level at which you sold futures, you will not benefit from the higher prices. You will also have to deposit margin payments to maintain your position. These payments can cause pressure on cash flow throughout the season.
- Put Options (Milk Price Protection)
How it works: Milk Price Protection simplifies a common financial tool (put options) making them easy to access and use through an integrated solution.
You pay an upfront premium to secure a minimum milk price for your milk solids. If market prices drop below your agreed price, you’re protected and paid the difference. If market prices rise, you keep the flexibility to take advantage of the higher prices without being locked in.
Pros: Put options offer downside protection with upside flexibility. You’re not tied to a fixed price, and there are no unexpected cash payments during the season. While it may cost more upfront, the price is fixed with no unexpected extra costs. The upfront premium may be tax deductible but individual circumstances will vary so we recommend you seek tax advice from your accountant. Payments are made at the end of the season.
Cons: You pay the premium upfront, even if market prices don’t drop.
Which option is best for me?
The best choice depends on your farm’s priorities and how you manage risk. Fixed Price Agreements are ideal for guaranteed income certainty and a simple setup, but you won’t benefit from higher market prices. Futures Contracts work well if you want to choose your price and prefer a lower upfront cost, though they require regular market monitoring and potential extra payments. Put Options are best for flexibility, protecting against price drops while benefiting from higher prices, with clear upfront costs and no unexpected payments.
Use the Calculator: Log in to Figured and calculate what Milk Price Protection could look like for your farm, including estimated premiums.
Speak with Your Advisor: Discuss your strategy and confirm the milk solids you'd like to protect.
Create an Account: Sign up for a StoneX account through Figured and complete the onboarding application to unlock Milk Price Protection.
Lock in Your Prices: Secure a minimum price for your milk solids and start protecting your farm’s income.