New Zealand's NZX launches milk futures to tepid early demand
Financial exchange operator NZX Ltd on Friday launched New Zealand's first milk futures contract, offering dairy farmers in the country a new tool to manage risk as they grapple with plunging prices.
Early takeup of the contract was slow with just two trades in the first session, but dairy industry officials and analysts said liquidity would grow as more farmers looked to lock in forward pricing.
Global dairy prices have plummeted more than 50 percent since early 2014, hit by oversupply and slowing demand in China. New Zealand and its 10,500 farmer shareholders of the Fonterra Cooperative Group Ltd , the world's largest dairy exporter, have been hit particularly hard.
"Suppliers of milk are finding the current environment untenable," Kathryn Jaggard, NZX head of derivatives, told Reuters.
"They just can't manage that risk and they are looking for ways to do that."
The milk futures contract joins a group of other dairy futures contracts in New Zealand, such as for whole milk powder and skim milk powder, launched in 2010. The new contract, however, is related to the actual milk price paid to farmers.
Similar trading schemes already exist in Europe and the United States, but New Zealand has been slower to adopt its own, in part due to the cooperative nature of Fonterra's structure, but an explosion in global trade has led to heightened price volatility.
Whole milk powder prices soared to more than $5,000 a tonne in early 2014, before falling back to around $1,800 last August. Prices were $2,252 a tonne in the latest Global Dairy Trade auction.
The first trades on NZX suggested some optimism that the milk price would improve longer term. The price for the September 2017 contract was NZ$4.35 ($2.93) per kilogram, slightly higher than the NZ$4.25 Fonterra this week predicted it would pay in 2016-17. Fonterra's forecast was below breakeven for the third year running..
The September 2018 contract price was NZ$5.60.
Nigel Brunel, director of financial markets at OMF, New Zealand's largest broker for dairy futures, said usage of the tool would depend on pricing.
"(The current price is) below break even for a lot of farmers, so if they use it to hedge, they will effectively be hedging a loss and that may be a bit of a stretch for some," said Brunel, adding that he had seen interest from some of his farmer clients.
Andrew Hoggard, who runs a dairy farm on the North Island, said farmers would need independent advice and education before jumping in.
"We will have a discussion around what we want to achieve and whether we can use this to achieve that," he said of his own business. ($1 = 1.4832 New Zealand dollars)
