A whole-milk powder futures market is to be established by the NZX, expanding the stock exchange's reach into the agriculture sector.
It has been widely acknowledged the NZX, which runs the New Zealand Stock Exchange, wants to increase the number of large publicly-listed agricultural companies, with the ultimate prize seen as a partial listing of dairy co-operative Fonterra.
But with the largest rural companies co-operatively owned and Fonterra shareholders already rejecting a partial listing, the NZX appeared to be looking at other avenues to strengthen its relevance to rural business.
It owns the specialist rural economic company Agri-fax and last month bought rural publisher Country-Wide Publications.
Announcing late last week the launch of the whole-milk powder futures, NZX head of trade products Fiona Mackenzie said other farm commodities would follow suit.
"Over the next 12 months NZX plans to launch a range of derivative products, including the cash-settled milk future," she said.
A milk powder futures market was a world first and would put the product on a similar footing to other futures-traded commodities around the world.
"Currently, there are no milk-derivative contracts listed and traded on an exchange that provided an accurate hedge for milk powder.
Other agricultural sectors enjoy the benefits of listed futures and options to mitigate price risk - for example, wheat, coffee and corn - and NZX wants to make similar products available to the dairy industry."
The NZX was still to consult dairy farmers, processors, global players in the dairy sector, NZX clients and banks, but it intended to have a cash-settled futures contract running by the end of the year, which would be traded on the NZX and centrally cleared through a new clearing house.
Fonterra's managing director of global trade, Kelvin Wickham, said the facility would help moderate the impact of volatile dairy prices and welcomed the opportunity to discuss the proposal with NZX.
Federated Farmers was yet to form an opinion but welcomed the opportunity to discuss the concept.
The chairman of its dairy section, Lachlan McKenzie, said an NZX futures market raised questions about Fonterra's monthly internet auction - globalDairytrade - a sales mechanism the lobby group said had not managed the risk of volatile milk powder prices.
"Futures markets done well, however, create price certainty by way of hedging risk. Past experience tells us of the need to have a broad range of commodities to create market depth as well as volume," Mr McKenzie said.
"It seems tailor-made for New Zealand given we are the world's largest exporter of sheep meat as well as the second largest dairy exporter on Earth. We think there's ample scope to look at a number of other tradeable commodities."
Miss Mackenzie said dairy-price volatility was driving demand from processors and buyers of milk powder for a risk management tool, and this could be used by farmers, processors and users to provide some insulation against fluctuating prices.
While Australian farmers used a futures market to manage prices for feed wheat, soft commodities such as milk did not have a futures market to manage volatility, despite world powder prices having risen and fallen 150% since 2005, she said.
Dairy futures would be traded through a broker in a way similar to shares, with the only difference to forward contracts being that they were traded on the NZX.
Miss Mackenzie said dairy was a logical starting point for an NZX futures market because it was so economically important to the country.
Unlike most other international soft commodities, it did not have a price-risk management system such as a futures market.
