Volatility, Variability and Certainty – Milk Price Options with Fonterra

For the 2025/2026 dairy season, Fonterra has extended the range of options available to farmers who wish to fix their milk price. In a global environment where “volatile” doesn’t do it justice, it’s not unreasonable to look for some certainty.

A History of Milk Price Volatility

Milk prices have seen significant swings over the years. The then record milk price of $8.40 in the 2013/2014 season was followed by a $4.25 payout. That was then backed up by a $3.90 payout per kgMS for the 2015/2016 season, which was crippling for many dairy farm businesses at the time.

While there is no major price slide in the outlook for the current season, it’s not inconceivable that milk prices could drop substantially, especially as price drops due to changes in demand can be sudden. By comparison, price rises tend to be slower and steadier, with incremental gains driven by buyers competing for product under the Global Dairy Trade (GDT) model.

Variability in the Current Season

Even with a favourable outlook early in the season, there remains a large amount of variability in the potential milk price. A range of $8.00 to $11.00 spans emotions from begrudgingly “should be okay but will take a hit” at $8.00, to an ecstatic “we’re in clover” at $11.00.

Shift that range down to $7.00–$10.00 and bank managers might feel nervy about the lower end. Not many new Ford Rangers would be purchased with a $7 payout now.

As at 21 August, the current season forecast range had narrowed to $9.00–$11.00.

Why Fixing a Milk Price Brings Certainty

Being able to lock in a fixed milk price gives certainty. Fixed milk price options are a form of hedging.

Fonterra’s model allows farmers to secure a milk price for a relatively low cost ($0.10 per kgMS for most options) for up to 50% of their milk supply. Once the price is fixed, one of the biggest business variables for the season is secured. This makes planning and budgeting easier, and gives confidence when contracting feed, committing to input prices, or negotiating finance.

With fixed milk price options, farmers can provide their banks with clearer budgets, potentially improving their ability to obtain finance at better rates.

Strong Uptake from Farmers

Per a recent article in Farmers Weekly, there were over 1,000 fixed milk price applications between June and August. Approximately 20% of Fonterra farmers make use of the Fixed Milk Price options over the course of a season.

The Options Available:

Standard Fixed Milk Price

The Standard Fixed Milk Price applies to the current season and has been around for several years. At the August event, the price after fees was $10.10, and this option saw increased interest.

Regardless of the final Fonterra milk price for the season, farmers who committed kgMS at that event will receive $10.10. The price could end up being $8.00 or $10.50:

• At $8.00, the farmer comes out ahead.
• At $10.50, there is $0.40 forgone.

As a general rule, some farmers have been reluctant to commit in the past, concerned they might miss out if the final milk price rises above the fixed level.

Minimum Milk Price

The Minimum Milk Price sets a floor price for the season. Unlike the other options, the cost of this tool is not the standard $0.10 per kgMS. The higher fee reflects the cost to Fonterra of essentially insuring against the payout falling below the set minimum.

At the August event, the minimum was $9.41. Regardless of the final payout:

• If the price falls below $9.41 (say $8.40), the farmer still receives $9.41, less the fee.
• If the price is above $9.41, the farmer receives the ordinary payout for the season, less the fee.

This option can be especially useful where banking covenants are in place, or to reduce price risk in the first season after purchasing a farm.

Fixed Milk Price Range

This option allows farmers to lock in a range of milk prices they are comfortable with for the season. If the actual payout ends up within that range, the farmer receives that price, less the $0.10 fee.

At the August event, the net range was $9.65 to $10.60:

• If the milk price ends below $9.65, the farmer still receives $9.65.
• If it ends above $10.60, the farmer caps out at $10.60.

This narrows the variability to just $0.95 between the top and bottom, reducing downside risk and giving greater certainty.

Future Season Standard Fixed Milk Price

The Future Season Standard Fixed Milk Price works the same way as the current season option, but applies a year in advance. Current offers are available for the 2026/2027 season.

While this may feel a long way off, it provides another tool to manage variability. For example, locking in a milk price can make it easier to budget when securing a two-year interest rate. The further ahead we look, the wider the potential range of prices becomes, so fixing some of the key business variables can help farmers focus on maximising efficiency or directing attention to other areas of their business.

Beyond Fonterra’s Options

For farmers who wish to fix more than the 50% of estimated production allowed under Fonterra’s scheme, other tools are available:

• NZX Futures Contracts
• Put Options
• Combination strategies to set a payout range
• Figured’s milk price protection, based on a minimum price

These financial instruments can give additional flexibility but also come with extra complexity and cost, so they need to be carefully considered.

Fixing your milk price results in different tax treatment for the timing of the recognition of income from milk proceeds. Each farming business will have their own unique circumstances that will have a bearing on the size of the impact of the tax timing.

Using the Fixed Milk Prices may help farmers to protect against price volatility, risk mitigation for input costs, enhance financial planning and give improved borrowing rate/capacity with their banks.