DMK has been running a fixed-price model for the past 1.5 years, allowing DMK farmers to offer a portion of their monthly milk volume at fixed prices. Now, research is under way as to whether this could also be introduced in the Netherlands for colleagues working at DOC. Professor Dr. Holger D. Thiele of Kiel University of Applied Sciences is also looking into this possibility. He is Professor of Agricultural Economics and Head of the ife Institute, which is responsible for calculating the monthly ife milk market value, or Kiel milk value, which is the basis for determining the fixed prices that are offered. He also developed the basic idea of the fixed price model for milk. DMK spoke with him in early March about the market situation and the role that fixed-price models play, how prices are calculated and whether people are using similar models abroad.
DMK: While commodity futures exchanges or hedging transactions have been around since the early days of stock exchanges, trading in milk is still fairly new. It’s certainly new for many farmers. What are the advantages for farms using models like Fixed Price compared to trading on the stock exchange?
Prof. Dr. Thiele: Farmers who want to trade milk independently on the stock exchange need to familiarize themselves with a complex topic on the one hand, while on the other, they also need the necessary l liquidity. These hurdles make it hard for farmers to participate in the market. Also, farmers in Germany currently are not able to open the kind of trading account they need in order to carry out their own hedging transactions on the stock exchange. So the dairy’s xed price model xes that, enabling farmers to participate without any of those additional demands and restrictions.
So a farmer can participate in the market and decide what price to o er the milk for. How do they benefit from that?
Prof. Dr. Thiele: Farmers gain much more planning security through xed prices for the milk volumes they hedge for future delivery dates. Farmers aren’t guaranteed to get the maximum prices but the model compensates for periods where prices are at rock bottom. Also, participating in xed-price models improves banks’ ratings for farms, helping them get nancing at better conditions, too.
Right now we are seeing peak prices and milk prices have been rising steadily for a few months.* Does it still make sense to participate in the Fixed Price model?
Prof. Dr. Thiele: JThe higher prices rise, the more likely it is that the situation will change and prices will fall again. So it can make sense to participate in a model such as Fixed Price, as nobody knows when that turning point will come. It means participants will then have secured that particular price. In principle, participation in xed price models makes sense for all farmers who want to have greater planning security and determine to a certain extent the prices at which they sell their milk. However, to do so, farmers need to have a good knowledge of their operating costs and to develop their own hedging stratey. If a farmer’s costs per kilogram of milk are lower than the xed price that can be hedged, then the farmer can secure these positive margins. But the tool is not recommended for anyone who hasn’t done these calculations, or whose sole aim is to achieve maximum prices. However, even those who do not use the tool for hedging can benet from it as they can monitor the price and the expectations for the price in the future.
The prices offered in Fixed Price don’t match the market value of milk – they are lower. Why is that?
Prof. Thiele: The ife market milk value is a future value for milk and it’s used as the basis for calculating the xed prices that are oered to those who participate in the xed price model. It indicates the milk price expected for the months ahead, based on the prices of butter and skim milk powder on the commodity futures exchange. So it only includes the price expectations from the two basic products, skim milk powder and butter, without considering other, possibly lower prices, such as for drinking milk and cheese or even different contract periods. The exchange milk value refects the price expectations and use by market participants at the current point in time and can change on a daily basis, if price expectations also change. It represents an overall utilization, while the xed prices offered by the dairies also include risk discounts. The exchange milk value applies to standard milk with 4.0% fat and 3.4% protein, from the farm, excluding value-added tax. That means that the average collection costs from milk producer to dairy are already taken into account. Also, the exchange value already includes the surcharges that are added to the price such as the logistics bonus. Furthermore, the average development of the exchange milk value differs to at a dairy, so the value has to be adjusted for this basic risk so it can be used as a hedge for milk producers. Likewise, the exchange milk value must be adjusted to the costs in the system for futures trading and the bank. That means the xed price offered, including the system-related deductions, is lower than the exchange milk value. Participating farmers additionally receive their usual individual surcharges with the milk for the respective month.
How about the situation abroad? Do other markets also have fixed price models?
Prof. Dr. Thiele: Thiele: We know that exchange-based xed-price models have long been a risk management tool in the dairy market in the United States. In Germany, at least ten dairies are currently implementing or are in the process of implementing exchangebased xed price models. DMK was one of the rst to make these offers available to its dairy farms. In Europe, there’s a high level of demand for xed price models similar to DMK’s, including in France, Belgium, the Netherlands and Poland. We are seeing a major increase in interest in these xed-price models throughout Europe and assume that if milk prices continue to fluctuate, they will also become an increasingly important offer for milk suppliers in our neighboring countries too.
*The interview was carried out at the beginning of March 2022.