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Jamie Gray is a business reporter for the NZ Herald

Milk price hedge passes final hurdles

NZX clear to launch futures contract bringing risk-offset tool to Kiwi farmers.
With 95 per cent of their product sold overseas,NZ dairy farmers are highly exposed to the global dairy market. Photo / File
With 95 per cent of their product sold overseas,NZ dairy farmers are highly exposed to the global dairy market. Photo / File

Farmers will have the opportunity to hedge their bets on the farmgate milk price when the NZX launches a milk price futures contract next month.

The NZX yesterday said it had received formal approval from the Financial Markets Authority and Reserve Bank for its proposed milk price futures and options contracts.

The contracts are designed to address growing demand from producers and purchasers of milk products wishing to manage risk relating to price fluctuations, following on from Fonterra's successful but now defunct guaranteed milk price scheme.

Nigel Brunel, director financial markets at OMF, said he believed the new contracts would get support from Fonterra.

"I would be very surprised if Fonterra did not support this," Brunel said, adding the new contract had already drawn strong interest from international trading houses.

Brunel said most futures contracts fail to get established in the early stages and that only a few manage to secure enough liquidity to keep on going, but he said the milk contracts stood a good chance of being successful.

Unlike the current NZX dairy derivatives market, which is priced in US dollars on a per tonne basis as a facility for the big manufacturers and customers, the milk futures contract will be priced in New Zealand dollars on a per kg of milk solids basis and will be aimed at farmers, brokers and banks.

NZX head of markets Mark Peterson said it was an important milestone in the development of commodity risk management tools needed to support New Zealand's agricultural sector.

With 95 per cent of their product sold overseas, New Zealand dairy farmers are highly exposed to the global dairy market, he said.

"They have few tools available to help them manage milk price risk which leaves farmers at a disadvantage to their overseas counterparts in the US or Europe, who have access to a wide range of risk management tools," he said.

In the case of New Zealand milk price futures, the buyers and sellers will settle by exchanging cash, calculated by reference to Fonterra's announced farmgate milk price.

Options contracts provide the buyer with the right but not the obligation to buy or sell a particular asset or commodity at a predetermined price, on an agreed date in the future.

Fonterra's current farmgate milk price sits at $3.90 a kg of milk solids, compared with the $5.25 per kg average breakeven point for farmers.

- NZ Herald

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