From family farms to biscuit giants, each faces the same question: how do you protect margins when markets won’t sit still? Volatile dairy markets can make planning feel like guesswork. The right hedging tool can’t remove all uncertainty, but it can provide stability, helping businesses to budget more confidently and focus on what they do best.
Here are three real-world examples that illustrate which hedging tool works best in different situations:
Scenario 1 – Cheese processor
For a mid-sized cheese processor, milk is the lifeblood of production. But when milk prices swing, profit margins move just as quickly.
By hedging around half of their milk intake through OTC swaps, this processor was able to stabilise costs and negotiate long-term contracts with greater confidence.
Profile: A mid-sized UK cheese processor, buying 50 million litres of milk per year
Action: Hedge 50–60% of the milk volume (approximately 25–30 million litres) via OTC swaps on an EEX liquid milk index
Worked example:
- Forecast: 4.1 million litres per month
- Hedge: 2.05 million litres per month via an OTC swap at 42 pence per litre
- Physical market rises to 44 pence per litre
- Hedge pays out: 2 pence per litre × 2.05 million litres = £41,000
Result: The hedge stabilises the margin on cheese contracts. While it doesn’t eliminate volatility, it cushions its impact, allowing the processor to focus on making cheese, rather than chasing milk prices.
Best fit tool: OTC swaps are ideal for buyers who want cost certainty on core volumes, while still allowing for some flexibility.
Scenario 2 – Biscuit maker
Butter demand is highly seasonal, especially around Christmas. For one biscuit manufacturer, the festive spike threatened to blow their budget just when production was busiest.
To secure budget certainty, they decided to purchase a call option on butter. This strategy allowed them to manage price fluctuations effectively; if prices rose, the option would pay out; if prices fell, they could still purchase cheaper butter from the market.
Profile: Large biscuit manufacturer, using 1,200 tonnes of butter per year, with an additional 400 tonnes needed at Christmas
Action: Buy a call option ahead of time for butter exposure from November to December
Terms:
Strike price: €5,000 per tonne
Premium: €120 per tonne (paid upfront)
Worked example:
- If the market price rises to €5,400 per tonne, the option pays out €280 per tonne (after accounting for the premium), resulting in a total saving of €112,000 on the 400 tonnes needed
- If the market price drops to €4,700 per tonne, the option expires worthless; however, they can purchase butter at the lower market price, capping their loss at the €48,000 premium paid
Result: Budgets stayed predictable during the busiest season. If prices spiked, the option paid out; if they softened, the manufacturer still enjoyed cheaper butter. The only cost was the upfront premium — a small price for peace of mind.
Best fit tool: Options act like an insurance policy. They are helpful when you want a safety net against price spikes while still being able to benefit from lower market prices.
Scenario 3 – Family farm
For a family farm, a few pence per litre can be the difference between profit and loss. By hedging a portion of their output using swaps, they could protect against downside risks while still benefiting from potential price increases.
Profile: 250 cows producing approximately 6 million litres per year (around 500,000 litres per month)
Action: Hedge 50–60% of output (about 3 million litres) over 12 months using OTC swaps linked to an EEX liquid milk index
Worked example:
- Swap entered at 43 pence per litre
- If the market falls to 40 pence per litre, the hedge pays out 3 pence per litre × 3 million litres = £90,000
- Settlement occurs monthly over the 12-month term
Result: If prices fall, the farm’s income remains stable. If prices rise, the farm keeps about half of the upside.
Best fit tool: OTC swaps are an effective solution for producers to stabilise cash flow while still having some exposure to favourable market prices.
What works best for you
There’s no single hedge that works for everyone. Swaps provide processors and farmers with stability for their core volumes, while options offer a safety net for volatile inputs, such as butter, allowing you to benefit if prices soften. Often, the smartest approach is to blend both: lock in what’s essential, hedge what you can, and maintain flexibility where it adds the most value.
The best hedge isn’t about following a specific formula; it’s the one that’s customized to suit your business, your goals, and your appetite for risk.