VOLATILITY is the major threat facing milk producers.
The increasing complexity of trade, exacerbated by recession in the developed world, has led to shorter, sharper swings in export returns. The vagaries of the weather, fluctuating feed costs and a rising cost base add to the challenges dairy faces.
For a couple of decades to 2007, the greatest source of price volatility was intervention by European and US governments.
Using export subsidies and domestic market purchases to smooth their own internal markets, the world market was used as a junkyard to deal with their own surpluses.
The European Union has expanded to 27 nations in recent years and faced up to the folly of ploughing vast sums of money into uncompetitive farming systems.
Full EU deregulation is some years away and has to take a few important steps, such as removing production controls on farmers. The US will eventually follow.
Food-security concerns in the world may force a return of protectionist measures, but the evils of volatility won't ever be solved by regulation.
Regulation tends to be poorly designed, leads to further distortions and ends up with the wrong people paying for problems.
In July 2008, Fonterra pioneered efforts to provide a basis for forward-price protection for buyers and sellers when it started a milk powder auction. That auction has now spread its product range and is established as a market lead-indicator.
New Zealand's stock market operator NZX has plans to kick off its own futures market in milk powders in June.
The recent announcement of two new platforms for futures trading in dairy products provides a further strong indication that we're looking forward to a very different world.
These systems only work if artificial stimulants don't exist or have minimal influence.
The CME Group, operator of the Chicago Board of Trade, announced the launch of international skim milk powder futures and options contracts due to start in just five weeks.
The CME product will be the first exchange-listed dairy contract with physical delivery points around the world. At the end of June, a new dairy-based futures trading will be launched by the German/Swiss futures exchange Eurex, trading futures based on butter and skimmed milk powder in Europe.
The developments come at an interesting time, with the European Commission announcing last week that it will come up with a new set of "rules" for the dairy market.
These rules won't completely close the door for the ardent pro-regulators in the EU farm sector, but the words from the new agriculture boss were carefully chosen; the "no turning back" message will have given a bit of comfort to the managers of these new market instruments.
