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NZX plans to launch a cash settled futures contract that will enable dairy participants worldwide to hedge price risk in the whole milk powder market.
Over the coming weeks, NZX will consult with New Zealand dairy farmers and processors, global participants in the dairy supply chain, and NZX participants and banks regarding the details of the product.
The intention is to launch a cash settled futures contract traded on NZX and centrally cleared in the new Clearing House by the end of the year.
NZX Head of Traded Products Fiona Mackenzie said, “The volatility in the dairy market is driving demand from processors and buyers of milk powder for the development of a risk management tool similar to those available in other commodity markets. NZX is responding to that demand.
“Agricultural products are the backbone of our economy and New Zealand supplies around 40% of the growing whole milk powder market globally. It’s a natural ï¬ï¿½t for New Zealand to host the trading of milk derivative contracts, and to meet the global demand for risk management tools in the dairy industry.”
Volatility in commodity markets over the last 48 months has been unprecedented and dairy has been no exception - with prices for milk powder rising and falling 150% since 2005. Previous to this the milk powder market had experienced fairly constant price stability since 1994. It is a widely held view by the market that recent volatility will continue, and this expectation is driving demand for a product that allows participants in the dairy supply chain to easily hedge this price risk.
Currently there are no milk derivative contracts listed and traded on an exchange that provide 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.
”It is important to NZX that, prior to finalisation of the product details, the opinions of all dairy participants are heard as part of a broad and inclusive consultation process, from farmer right through to manufacturer,” said Fiona Mackenzie.
Over the next 12 months NZX plans to launch a range of derivative products including the cash settled milk future.
