Blog – Fixed Milk Price Options: Your Financial Shield in Good Times & Bad

Picture this: You’re sitting at your kitchen table in March 2026, staring at a milk price forecast that’s just dropped to $6.50/kg MS. Your budget was built around $8.50. Your neighbour across the road? He’s sleeping soundly because he locked in $8.20 for 40% of his production back when everyone thought he was being overly cautious. 

Which farmer would you rather be? 

The Sweet Spot Trap

Right now, dairy farmers across New Zealand are enjoying what many would call the “sweet spot” – milk prices are looking healthy, the season’s off to a promising start, and optimism is running high. It’s tempting to think, “Why would I need to lock in prices when things are going so well?“ 

But here’s the reality check: the best time to buy insurance is when you don’t think you need it. 

The Brutal Mathematics of Milk Price Volatility 

Let’s talk numbers that’ll keep you awake at night. Over the last decade, New Zealand whole-milk-powder auction prices have swung between NZ$5 and NZ$10 per kg MS – that’s a jaw-dropping 100% range from trough to peak. 

For a typical 100,000 kg MS farm, here’s what that swing means in real dollars: 

• A $1/kg move = $100,000 more or less in farm revenue 

• The full $5-10 swing = ±$500,000 impact over the season 

To put this in perspective: your entire feed budget (around $1.00-$1.20 per kg MS) could be wiped out by just a $1/kg drop. Your debt servicing, capital purchases, that new effluent system you’ve been planning – all of it sits within this volatile range. 

With production costs now ranging between $4.00-$7.50 per kg MS (and that’s before debt servicing and living costs), the margin for error has never been tighter. 

Your Risk Management Toolkit: More Options Than Ever 

The good news? You’ve got more tools in your arsenal than ever before to manage this risk. 

1. Fonterra Fixed Milk Price (FMP)

The tried-and-true option that lets you lock in between 10% and 50% of your forecast production across ten application windows (March through December). You pay a service fee of around $0.10/kg MS, but you get certainty – no margin calls, no daily cash flow stress. 

2. Fonterra’s New Offerings (June 2025)

Fonterra has expanded their toolkit with two exciting new options: 

Floor Price Option: Think of it as an insurance policy with unlimited upside. You set a minimum price floor, pay a one-off service fee, and if the final price falls below your floor, you get topped up in September. If prices rally above your floor? You capture every cent of that upside. 

Price Band Option: A zero-cost collar that combines a floor (protection) with a cap (sacrifice some upside). Perfect if you want downside protection without paying fees, but you’re willing to cap your gains at a certain level. 

3. Figured Milk Price Protection

Here’s where things get really interesting. Figured offers put options that work like a safety net under your milk price. Here’s how it works: 

You can purchase put options that guarantee you a minimum price for your milk, while still allowing you to benefit from any price increases. Think of it as buying the right (but not the obligation) to sell your milk at a predetermined price. 

How Figured Works: 

• You select your desired floor price (the minimum you want to receive) 

• Pay a premium upfront (like any insurance premium) 

• If milk prices fall below your floor, Figured pays you the difference 

• If prices stay above your floor, you keep the higher market price 

• No margin calls, no daily cash flow impacts 

The beauty of Figured’s approach is its flexibility – you can tailor coverage to your specific needs and risk appetite, whether that’s protecting just your break-even costs or securing a profitable margin. 

4. Milk Futures Contracts

For the more sophisticated operators, NZX futures offer precise hedging. Each contract covers 6,000 kg MS, cash-settled against Fonterra’s final farmgate price. The trade-off? You’ll need to manage margin calls and have the expertise to adjust positions as markets move. 

Why Good Times Are Actually the Best Times to Hedge 

This is counterintuitive, but hear me out. When milk prices are strong (like they appear to be now), hedging tools often offer more attractive strike prices. You’re locking in good returns rather than scrambling for protection when prices are already falling. 

Consider this scenario: If current forward curves are pricing milk at $8.50+ per kg MS, wouldn’t you rather lock in that level of certainty for at least part of your production? Even if you only hedge 30-40% of your volume, you’ve guaranteed that portion of your cash flow. 

The key question isn’t whether you think prices will stay high – it’s whether you can afford to be wrong. 

Building Your Strategy: The CMK Approach

At CMK Accountants, we’re seeing smart operators take a layered approach: 

1. Identify Your Break-Even: What’s the absolute minimum milk price you need to keep the lights on? 

1. Assess Your Risk Appetite: How much upside are you willing to sacrifice for downside protection? 

1. Diversify Your Tools: Maybe it’s 20% in Fixed Milk Price, 15% in Floor Options, and 10% through Figured’s put options. 

1. Plan Your Cash Flow: Ensure any service fees or premiums fit comfortably within your working capital plan.

    

The Bottom Line 

Here’s the question that should guide every hedging decision: “If milk prices dip below my break-even, will I still have the liquidity to keep the shed lights on – and if they rally, do I want and need every cent of that upside?” 

Current rosy forecasts are fantastic, but they shouldn’t lull you into complacency. The farmers who sleep well at night are those who’ve built financial resilience into their operations, regardless of what the market throws at them. 

Remember: You don’t hedge because you think prices will fall – you hedge because you know they might, and you can’t afford to be caught unprepared. 

Don’t Wait for the Storm to Buy Your Umbrella

The time to act is now, while prices are strong and hedging options are attractive. Every day you delay is another day of exposure to the full force of market volatility. 

Here’s what you need to do: 

• Calculate your true break-even costs per kg MS (including debt servicing and living expenses) 

• Contact CMK Accountants to model different hedging scenarios for your farm 

• Implement your chosen risk management strategy before market conditions change

   

Ready to build your financial shield? 

Call CMK Accountants today at 067656178 or email us at cmk@cmk.co.nz to book your Fixed Milk Price Strategy Session. 

Don’t be the farmer lying awake at 3am wondering “what if?” Be the one who planned ahead and can sleep soundly knowing your downside is protected. 

Your future self will thank you.