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Dairy futures trading based on the prices paid at Fonterra's fortnightly commodities auctions starts tomorrow morning at the NZX Ltd stock exchange.
The NZX has said it is the only company to offer global, cash-settled, exchange-traded contracts to help people manage risks in the world dairy market, but it is also expecting some participation by speculators.
It will start trading contracts in whole milk powder (WMP), but plans to launch contracts in other products over the next year. Its reference price will be based on Fonterra's fortnightly commodity auctions, which were also initially targeted to WMP.
NZX has said that "market volatility" in the sector led to demand for a risk management tool similar to other commodity markets. A trader who buys a futures contract for $US2500/tonne for settlement in a year will make a gain of $500 if the final settlement price -- based on Fonterra's auctions -- increases to $3000 a tonne.
Dairy derivatives have been forecast to provide annualised trading revenue of up to $2.9 million, and clearing and settlement revenue of up to $1.1m, NZX has told investors.
According to NZX's head of markets, Fiona Mackenzie, Fonterra's share of nearly 40 percent of internationally-traded dairy products created a "natural fit" for New Zealand to host the trading of milk derivative contracts, and to meet the global demand for risk management tools in the sector.
NZX also has plans to launch equity options, and index futures in addition to the dairy commodity derivatives.
The world's largest and most diverse derivatives exchange, Chicago Mercantile Exchange Inc (CME), has separately launched deliverable skim milk powder (SMP) futures and options on those futures, in parallel with existing contracts for cash-settled futures in SMP. The CME includes Auckland as one of its approved delivery points for SMP.
Those contracts for 44,000 pounds (20 tonnes) of Grade A milk trade 23 hours a day, with some bought and sold by speculative investors, and others are used by dairy farmers trying to manage the risks posed by uncertain milk prices.
Futures traded on other exchanges include lean hogs, frozen orange juice, coffee and sugar.
But the NZX futures will not expose players to the potential additional risks associated with physical delivery, and NZX chief executive Mark Weldon has said that moving into commodities will be good for the company because risk management products, including futures, have shown consistently high activity levels and volume growth in recent years.
The local dairy futures will be traded 8am to 4pm on the NZX electronic trading platform Global Vision, and cleared through NZ Clearing Corp. One tonne contracts will be priced in US dollars per tonne, with minimum price movements of $US5 and a range up to 18 months.
Initial traders are expected to be global dairy processors or purchasers.
Other contracts expected to be introduced will be in SMP, and anhydrous milk fat (AMF), an industrial butteroil, and the NZX has talked about branching out to other agricultural and gas and carbon derivatives in 2012.