Fonterra should introduce a quarterly-based milk price system, which would reduce price volatility and lessen the risk of farmers going out of business, says ASB rural economist Nathan Penny.

If farmers were given forecasts which covered just the quarter ahead and were paid at the end of the quarter, they would know more accurately how much milk to produce.

In a paper titled “Lessons from the dairy downturn”, Penny said under the present system, Fonterra usually provided a conservative forecast early in the season, partly because it did not want to overpay farmers and later claw back payments.

 “They build in uncertainty so they are conservative, and then they layer on the technicality of possibly overpaying.”

Penny said the advance payment system compounded the issue. The payments started off low, which did not reflect the market price, causing farmers to under produce.

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