Fonterra GMP scheme – should I or shouldn’t I?
In a market of declining international milk powder prices the Fonterra GMP scheme has been under-subscribed for two times in a row. In fact only 180 farmers took advantage of the latest offer. Go figure!
The irony is that Fonterra’s June 2013 offer for the 2013/14 season was over-subscribed at a GMP of $7.00 when the final season pay-out was $8.40 AND both the June 2014 and December 2014 GMP offers for the 2014/15 season were undersubscribed at $7.00 and $4.70 respectively when the final pay-out is likely to be sub $4.50. Those that took up the oversubscribed June 2013 offer ended up $1.40 per kg MS worse off and those that took up the undersubscribed June 2014 offer are likely to end up a whopping $2.50 per kg MS better off! Is this just too hard? Should the scheme be scrapped? I am fairly confident the appeal of being a Dairy Farmer is not the uncertainty of your income – the excitement (stress) of not knowing whether you will be able to meet those loan payments, the uncomfortable “discussions” with your bank manager, the sleepless nights worrying about whether to let go a labour unit or spend that money on feed. All that stress could be gone if you locked in a milk price for up to 75% of your supply!
So, why wasn’t the December offer of $4.70 fully subscribed? Two reasons. Dairy Farmers didn’t perceive the scheme to have enough benefits to warrant taking the offer up and they were put off by the results of the first offer when Dairy Farmers ended up $1.40 worse off. Back in December when the forecast DMS pay-out was $4.70 the perception was that there was more chance of upside than downside so why lock in at $4.70? Particularly when in the December offer you could only lock in up to 35% of your expected production. I mean how bad can it get? Well, based on the latest opinion from ANZ $4.35 bad. So it would seem that the GMP scheme has been a great success recently for those farmers who have chosen to use it with 2 out of 3 wins so far. And what’s more the last two offers have been the wins.
There is no doubt that the scheme has benefits, particularly for those new to the industry or with high debt. Through using the GMP scheme you get more certainty of income, this leads to more confidence and better decision making when it comes to planning for capital expenditure, debt repayment, feed management, labour management and tax payments. And you never know – you may just end up $2.50 better off per kg MS like those who took up the June 2014 offer.
So would I take up the Fonterra GMP scheme June 2015 offer? If I had to make a call right now I would say no. All indications are that the 2015/16 season will start with a soft opening milk price and firm up towards the end of the season. That puts us back to the June 2013 offer where those that take up the GMP scheme are likely to be worse off. That will make it 2 out of 4 for the GMP scheme. But ask me closer to June.
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