Upturn in Fonterra powders sets scene for futures trade

Photo / Sarah Ivey

Significant price lifts in Fonterra's internet auction of commodity milkpowders have set the scene for the start of NZX trading in global dairy futures contracts.

Dairy futures trading has previously been tried with little success in the United States, but the New Zealand-based futures will be only be traded in cash, won't be deliverable, and will be for whole milkpowder (WMP).

From this month, Fonterra's auctions - which provide the reference price for the NZX futures - will take place twice a month: the next is on September 16, with another on October 6.

"Having two events a month will provide a lot more visibility when it comes to assessing the market direction," said Fonterra's global dairy trade manager, Paul Grave, who noted that yesterday's auction result appeared to indicate a firmer tone had returned to the market.

The NZX will start trading in its WMP futures contracts on October 8, and the next Fonterra sale to provide a check for those speculators will be on October 20.

The contract will use Fonterra's global dairy trade WMP contract as the reference price for cash settlement.

Overall, the auction's trade-weighted index rose 16.9 per cent yesterday, with the average selling price for all contracts, across all product lines, rising to US$3562 a tonne.

This turned around declines over the past four months of 8.3 per cent in August, 13.7 per cent in July, 3.5 per cent in June and 0.8 per cent in May.

Prices paid for the core product at the auctions, WMP, rose 18.8 per cent to US$3522/tonne, across all contracts.

Over contract period 1, for November delivery, it actually jumped very sharply, by 24.9 per cent, to US$3624.

Prices per tonne for the five lines of WMP were: regular (NZ) US$3625, instant (NZ) US$3675, UHT (NZ) US$3700, regular (Aust) US$3495, and instant (Aust) US$3545.

WMP is the product line in which Fonterra sells its greatest volumes: New Zealand dominates the market for WMP exporting around 700,000 tonnes a year, compared with the EU exports of about 400,000 tonnes.

The company said 151 bidders participated yesterday, and there were 75 winning bidders over 10 rounds which took over two hours.

Fonterra said it was still trying to persuade other leading dairy companies to also sell product through the auctions: "We remain hopeful that new sellers will be added to the platform sometime in 2011," Grave said.

The futures trade using the reference price from the auctions was originally due to start in April or May, but the NZX delayed that in March, when it set down the launch of WMP futures for June, to be followed by skim milkpowder (SMP) and anhydrous milkfat futures in September.

Fonterra's online trading platform also sells SMP, buttermilk powder, and an industrial butter oil, anhydrous milkfat , some of which have previously also been earmarked for derivatives trading on the NZX market.

Contracts, based on US dollars per tonne, with a US$5 minimum price movement, and in one-tonne units, will be settled through New Zealand Clearing Ltd.

The contracts are expected to be promoted to farmers, processors, manufacturers, distributors and buyers of raw and processed agricultural products as a risk management tool offering accurate hedging to cope with the increasing volatility being seen in global markets for dairy commodities.

Only about 7 per cent of global milk production is traded on international markets each year, but this amounts to millions of tonnes, and the WMP trade alone is about 1.6 million tonnes.

The stock exchange has said it will introduce new futures and options products through the rest of this year and into next year.

It was at one point planning a derivatives trade in electricity, but New Zealand's power generators were won over by a rival exchange across the Tasman, the ASX.

Other plans the NZX has floated include dairy futures options in 2011, single stock equity options for Telecom and Fletcher Building, equity index futures (NZX10 and 50), followed in 2012 by other agricultural derivatives, and gas and carbon derivative products.

- NZPA