The New Zealand Stock Exchange expects to launch its first
dairy futures market in June, initially offering whole milk
powder contracts but eventually extending it to other dairy
products.
Exchange derivatives manager Katherine Jaggard said interest
had been high, both locally and internationally, which was an
indication the dairy sector lacked such risk management tools
compared to other traded commodities, like grain and coffee.
"Certainly, everybody we have spoken to offshore is keen to
see the market take off in dairy."
The contracts operated independently of the buying and
selling on the physical market and Miss Jaggard said NZX had
been in contact with New Zealand and Australian dairy
processors, who were positive about the venture.
"They were all positive and keen to know more and understand
how they can use the product."
New Zealand will this year account for about half the world
trade in whole milk powder, so she said it was appropriate
the NZX operated a futures market for the product.
Given the dairy industry's importance to the economy, Miss
Jaggard said a futures market allowed processors, buyers,
brokers and farmers to hedge prices against any movement.
Futures would be electronically traded and cleared by the NZX
clearing house.
Settlement would be by cash and linked to Fonterra's monthly
globalDairyTrade.
Futures' contracts, or hedging, was an agreement to buy or
sell a set quantity and quality of goods at a given date in
the future, at an agreed price.
The contract hedged against price increases or decreases.
Typically, with contracts for other well established
products, futures were traded between two and eight times
before settlement, but Miss Jaggard thought it would take
several years for that to happen with dairy products.
Farmers were interested in hedging their income against price
fluctuations, but initial activity was expected from others
in the industry, such as processors, buyers and traders.
She said New Zealand farmers were already regularly viewing
the Chicago Mercantile Exchange milk futures to get a steer
on where dairy prices were headed.
But this market traded in United States raw milk, which was
influenced by political decisions such as subsidies and state
support.
Eventually, she would like dairy farmers to view the NZX
dairy futures market on a daily basis, as they did now with
the exchange rate.
"We see the exchange rate every day. It would be great to see
the whole milk powder price every day.
"The data would be helpful to farmers. It would give them an
idea where demand levels are," she said.
Final regulatory approval was being completed, but Miss
Jaggard said NZX planned to extend it to other dairy
products.
She declined to elaborate or provide a time line.
"We are looking at dairy derivatives - it won't just be whole
milk powder. New Zealand is in a very strong position for
physically traded whole milk powder and New Zealand is the
logical hub for derivative trades in dairy futures."
