Now that we no longer have devices like milk marketing boards and large scale intervention buying to manage dairy markets (both of which had big problems), there has been an interest in the deployment of novel financial instruments to help farmers cope with market fluctuations. However, you have to be quite a financially sophisticated farmer to be able to use them and they potentially working best in cooperative arrangements.
Indeed, the traditionally conservative cooperatives are now becoming more active as they look for ways to hedge against fluctuating prices. Big processors are using futures to fix their prices and the big retailers are also involved.
A total of about 20,000 tonnes of skimmed milk powder, butter and whey were traded on the EEX dairy futures market in September, the highest monthly volume on record. Skimmed milk futures were launched in 2010, but there has been a lack of liquidity.
The market is still illiquid, but analysts believe that we are at a tipping point.
Record summer temperatures across Europe affected supply. Brexit is also driving volatility in Britain and Ireland.
John Lancaster, a senior analyst at a commodity broker, told the Financial Times:'It's become more obvious to people that high volatility is not going away.'