NZX announced today that the company believes there is value in clarifying the purpose and origin of reference prices for futures markets following reports of Open Country Dairy’s objection to globalDairyTrade (gDT) being used as a reference price for NZX’s Dairy Futures.
A futures market reference price is a market mechanism that brings a high degree of transparency to pricing in any market - including the market on which the underlying reference price is determined.
As the operator of several markets (equity, debt, electricity, grain), NZX understands that the credibility of a market is critical for investors’ trust and participation. Therefore NZX was very careful and considered when it came to deciding exactly which price NZX Dairy Futures should settle to.
NZX consulted widely last year with firms across the dairy industry, including Open Country Dairy, to determine the best reference price to use for Dairy Futures. After exhaustive analysis and ongoing consultation, it was determined that gDT is the most transparent and credible benchmark.
The only potentially viable alternative to using gDT as the reference price for NZX Dairy Futures was for NZX-owned Agrifax, which supplies agricultural data to a range of local and international clients, to conduct a daily survey of dairy prices in order to establish an aggregate reference price across the industry.
This option was entirely dependent on broad participation from dairy processors in the survey. By far the majority of these firms were reluctant to provide their prices to the survey. It was a degree of price transparency in respect of their day-to-day operations that they were not comfortable with.
Therefore - despite the fact that settling a price to an Agrifax index would materially grow the value of NZX - NZX decided that it would settle to gDT as it better represented actual prices paid for whole milk powder, and was the best reference price for the entire dairy industry, not just Fonterra.
NZX has also spent significant time working with regulators on the futures market, and is very comfortable with the integrity of the gDT processes, and the level of regulatory overview that they will have - including by the New Zealand Securities Commission.
The entire NZX Dairy Futures market will be heavily regulated, in the same way that other global markets are regulated, and subject to a series of strict rules, oversight, and securities markets law.
Regulation imposes an additional level of transparency over pricing. The Securities Commission understands how this works, and has released a guidance note to reflect that. Whilst anyone can make a complaint to the Securities Commission in New Zealand, and they are obliged to consider it, the Commission has been clear about its position.
NZX views the fact that Open Country Dairy is able to make a complaint as evidence that this transparency is already working, and NZX is happy to be part of the process of ongoing challenge and communication as the market grows.
Soon the benchmark for dairy pricing is going to be a matter of regular public record, and having the scrutiny of a global external market, and its regulators, will afford increasing transparency over the reference price - gDT - and its formation.
NZX is pleased that Open Country Dairy has expressed their desire to trade in the Dairy Futures market and welcomes their participation.