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Dairy Industry

Fixed Price

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17.12.2020
A model for fixed milk prices enables means farmers are better able to plan

Raw milk prices in Europe have become considerably more volatile since 2007, and the extreme market fluctuations are expected to continue. That makes it difficult to predict how the market will develop, and creates liquidity risks for milk producers who want to minimize risk for their operations, while increasing liquidity and improving their ability to plan. DMK’s new fixed price model seeks to address this, and is a key building block for further developing relations with its members, as a supportive cooperative. The members of the cooperative have been focusing more and more on the idea of hedging the milk price over the past few months, as they seek to manage and develop their supply relationships and improve planning for their operations.

 

The DMK committees initiated the project. “These days, as markets are fluctuating so much, we farmers need alternative price models. Fixed Price is a great opportunity for farmers and for the dairy as a whole,” says Thomas Stürtz, Chairman of the DMK Cooperative Management Board. The main idea was to hedge for lower price phases, for example during the pandemic this year.

Modern pricing model that’s easy to use

There has been interest in this idea for some time, and the Agriculture department has spent the last two years working on an innovative way to hedge A model for fixed milk prices enables means farmers are better able to plan The market-based fixed price model: the fixed price, with the main aim to create a reliable model. All efforts focused on turning a broad topic with many complex processes into a model that‘s easy for farmers to use.

 

The result is a modern pricing model that‘s straightforward to use. It also fulfills all the requirements, is legally compliant and has been assessed by numerous areas including contract management, IT processes, accounting, risk and liquidity management. Farmers can take part in the model voluntarily and DMK‘s base price is not affected, whether or not the farmer uses this or not. Mirko Wätjen, Project Manager of DMK Fixed Price, says, „There was not much out there that we could use to develop the Fixed Price, as the industry has little experience in this area. So we had a pilot phase involving 26 farms, and thoroughly tested the model under real conditions over a longer period of time. We assessed which processes worked well and examined where we should make changes. We learned a lot, and made the improvements that were needed.“

 

The first trading session with the pilot group was held in October 2019, and the model has been steadily optimized since then. It was opened up to members of the cooperative in September 2020. „Both sides learned a lot about the price hedging model during the months of the pilot phase. The positive feedback shows how important it is for our cooperative. We realize there‘s a lot of interest in topics such as hedging and stability, and we‘re glad to be able to offer our members a model that provides exactly this kind of support. Another important point is that the fixed price model is not for speculation, but is a vehicle for farmers to reduce risk and even out the price curve for individual farms,“ says Dr. Klaus A. Hein, Managing Director of Deutsches Milchkontor, following initial feedback about the project.

Potential for the future

After the pilot phase ended, farmers have been able to apply for access data for the DMK Fixed Price trading platform since the end of September, and receive information and training to offer some of their milk in two trading sessions. Fixed Price also offers new prospects for the future of the dairy, as if IT systems and security processes are developed further, the model could be a base for further developing the idea of security within DMK.

“The milk price has often been unpredictable over the past few years, and that’s likely to remain the case in the future. I have an overview of my costs but I would like greater planning security when it comes to my income. The new price hedging means I can influence part of my income in the future and that means I’ve got greater security for planning. That’s important as unpredictable events will happen in the future, too, like the pandemic right now. I’m happy about the introduction of Fixed Price, it’s good news for us milk producers.”

André Hornberg, Hornberg GbR, Gütersloh

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