New Zealand Dairy Farmers Milk Tech Innovation for Financial Stability
There are several reasons why so few farmers use hedging:
- It has been hard for farmers to access risk management tools
- Setting up futures accounts has been complicated and slow, often taking months
- Many farmers worry about missing out on higher prices if they lock in a lower price
The New Zealand dairy industry, a key part of the country's economy, is dealing with big challenges in today's complex market. At the recent New Zealand Fieldays, a major farming event, experts and farmers talked about the future of dairy farming and new ways to overcome current problems.
Matt Manning joined the “Dairy Insights: Heard Mentality” podcast recently to talk about Fieldays, which hosted approximately150,000 visitors over four days.
Matt, a dairy broker with StoneX in Sydney, shared his take on the challenges and opportunities for New Zealand's dairy sector with Dairy Insights.
The Risk Management Problem
Despite dairy's importance to New Zealand's economy, only about 9% of the country's total milk production was hedged for the 2023-2024 milk season. This means many farmers are at risk when market prices change.
"Farmers in New Zealand can't control the prices they get, and they face a lot of risk in their business," Manning explained. "Price risk makes up about 50% of the total risk to profit margin for farms in New Zealand."
The Price Taker's Challenge
New Zealand dairy farmers have little control over the prices they get for their products. They often have to make big business decisions, like buying feed or equipment, up to a year before they know what they'll be paid for their milk.
This uncertainty is made worse by the fact that many dairy farms in New Zealand have high levels of debt. The mix of high debt and unpredictable income creates a risky financial situation.
Market Changes and Global Factors
The global nature of the dairy market adds more complexity. Manning noted that current milk prices for the upcoming season are influenced by strong butter and fat markets. However, this strength might not last, and any weakening could significantly affect farm incomes.
Also, decisions about money policies, both in New Zealand and abroad, play a crucial role. Manning highlighted the potential risk if US and New Zealand policies on interest rates differ, which could affect currency exchange rates and milk prices.
Policy Changes and Environmental Concerns
Recent policy changes by the new New Zealand government have brought some relief to farmers. The decision not to include agriculture in the emissions trading scheme has eased worries about potential cost increases. However, environmental concerns are still important.
In fact, sustainability remains a key focus for the industry. Manning pointed out that banks are offering very low interest rates for sustainable farming projects. This shows the industry's ongoing commitment to protecting the environment, even as it deals with economic challenges.
New Solutions on the Horizon
Recognizing these challenges, the dairy industry is turning to new solutions. At Fieldays, StoneX introduced a new app called StoneX Trading, designed to help New Zealand dairy farmers manage price risks.
This app, available only in New Zealand, offers options that let farmers set a minimum price for up to three seasons in advance. It's much quicker to set up than traditional methods, taking about 15 minutes instead of months. It also eliminates margin calls, making it simpler for farmers to use.
"It allows these farmers to have good discussions with their bank," Manning noted. "From what we're hearing from bankers, it might help farmers get better loan rates if they have a good hedging plan in place."
Looking Ahead
As the New Zealand dairy industry continues to change, tools like the StoneX Trading app represent a step towards better risk management. By giving farmers easy-to-use hedging options, the industry is better prepared to handle market changes while staying competitive globally.
The challenges facing New Zealand's dairy farmers are big, but so is the industry's ability to innovate and adapt. As farmers get better at managing financial risks, they'll be better equipped to focus on what they do best: producing high-quality dairy products while taking care of the land for future generations.
Interested in Getting More Insights?
Listen to the full episode of Dairy Insights: Heard Mentality with Nate and Matt on Spotify.
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