A farm-gate milk price based on a shorter duration would help align New Zealand supply sooner with global market prices, reducing volatility, ASB senior rural economist Nathan Penny believes.
Over recent times, global dairy prices have been volatile. Since about 2007, volatility has more than doubled, compared to the period 1990 to 2006.
While many catalysts of volatility - such as weather and global politics - were out of New Zealand hands, mechanisms that influenced how it responded or adapted to those shocks were almost entirely within its hands, Mr Penny said in a recent ASB report.
Critical in that regard were the price signals that farmers faced.
''We suggest that the current season-based milk price system gives farmers prices signals that are at times out of whack with market prices,'' he said.
That point was well illustrated during the previous dairy cycle. When market-based prices spiked by around $3.50kg from the December 2012 quarter to the June 2013 quarter to an estimated $8.70kg in milk price terms, the prevailing milk price forecast lifted just 50c.
That modest lift in the prevailing milk price forecast opened a circa $2.90kg wedge between the forecast and market-based prices. Then when market-based prices fell, a wedge of $1.90 opened up in the opposite direction.
A quarterly-based farm-gate milk price would help moderate farmgate milk price volatility, Mr Penny said.
Open Country Dairy was already using such a milk price system although, for their suppliers, the season was divided into three parts. Similarly, some overseas jurisdictions were using higher frequency milk prices and payments.
Under such a proposal, monthly advances would continue as normal, though payments could be at a higher percentage of the milk price forecast than under the current system.
A quarterly system would help counter other weaknesses of the 12-month system. For example, forecasting out one quarter ahead would be easier, and forecasts upon which farmers based their decisions would be closer to the mark.
Fonterra would have less concern about over-paying farmers, enabling higher advance payments.
Quarterly forecasts would be more transparent and contain less judgement. While forecasters would still retain a view on the price outlook, forecasts were more likely to reflect current market prices as a starting point.Forecast accuracy would improve, making forecasts more useful for decision-making.
A quarterly system was also likely to allow more participation by farmers in the milk price futures market, he said.
A move to such a system would require legislative changes. The milk price calculation was enshrined in the Dairy Industry Restructuring Act and changes were not made lightly.