Fonterra have recently extended their current fixed price offer with three new options to hedge against fluctuations in the price of milk.
Farmers now have the option of locking in a min price (put option), price range (collar option), and extension to the fix price offer allowing fixing for an additional season. These offers are available to up to 50% of a season’s milk production.
While farmers now have more tools available for protecting against changes in the price of milk, an often overlooked aspect is the tax treatment of these offers. By accepting one of these new offers, you may now be subject to a different set of tax rules.
A lot of the offers are subject to the financial arrangement rules for tax. The financial arrangement rules may require spreading of certain income to different financial years, and on completion of the contract a base price adjustment to account for any gains or losses under the financial arrangement.
The tax consequences of these offers certainly should not distract from the using these offers to manage your income stream. However, it would pay to ensure you understand these before committing.
As always, we are available to help with any questions or concerns you may have. Please get in touch if you would like to learn more.