The New Zealand Stock Exchange (NZX) is confident that its whole milk powder future will establish itself as a global benchmark because it is not US centric, unlike the rival CME Group's contract.
The contract will be launched in June but an exact date has not yet been finalised. The future will be cash settled against the dairy firm Fonterra's monthly globalDairyTrade Index. Trading will be available electronically with clearing processed by NZX’s clearing house.
The new contract marks the bourse’s first foray into derivatives and puts the exchange in direct competition with CME Group’s milk contracts. The US exchange offers a suite of milk futures including class three and class four contracts, and non-fact deliverable milk derivatives.
The class three standard is considered to be the global benchmark for milk pricing. But Kathryn Jaggard, manager at NZX’s derivatives segment, thinks that NZX’s dry futures will be a successful competitor to that title.
“The daily market is unique in that it does not have any price risk management tools available for globally traded daily products,” Jaggard told FOW. “The CME Group lists a liquid class three milk contract but that it is very US centric and is also priced out of the US so not relevant or applicable to the globally traded dry milk commodity.”
Jaggard added that New Zealand’s position as the largest exporter of milk will aid the contract’s development, as large producers and buyers seek to manage their price risk. The price of milk has been extremely volatile over the last five years.
“Historically, dairy prices have always been fairly stable. But in the last five years or so, dairy prices have experienced significant volatility so there has a equally significant demand for a risk management tool to be launched,” Jaggard said. “New Zealand will represent just over 50% of the global whole milk powder market this year so there are a large number of producers in New Zealand and Australia which export globally, coupled with a large number of buyers in Asia, South America and the Middle East etc, that are equally exposed to price risk.”
The demand for a global benchmark price of milk may also encourage trading in NZX’s contract. In May 2009, the US imposed a subsidy on the price of US milk following a significant fall in demand. As a result, the only price risk management tool for milk, the CME Group’s suite of milk futures, reflects that subsidy in its pricing.
Despite the fact that the contract is the first derivative to be listed in the country, Jaggard said she is confident producers have a sophisticated understanding of derivatives as many of the firms are active in related commodity products such as coffee and coca.
Colin Packham cpackham@fow.com