NZX says dairy futures market launch successful

The NZX says its new dairy futures exchange launched successfully this morning. Photo / Mark Mitchell

The stock exchange's new dairy futures market launched successfully at 8am morning and one trade today would make NZX head of markets Fiona Mackenzie ecstatic.

"Getting it open successfully with no glitches is clearly a big moment and getting the first trade will be a big moment as well," Mackenzie said.

The exchange has been working on the futures market for two years.

Futures contracts are tools for managing price and cost risks, which effectively enable companies to lock in a price.

Whole milk powder futures was the first product to be launched by the NZX, with potential users including processors, manufacturers, dairy trading firms and farmers

Derivative markets did not launch like hot initial public offers with thousands of trades on the first day, Mackenzie said

"Success for a derivatives market is literally one maybe two trades on the first day," she said. "So today the focus is to get one or two trades in and we will be ecstatic."

Contracts ranged from one to 18 months, with buyers and sellers trading through a clearing house.

For every buyer there must a seller to match and vice versa.

"One person has to think something's going up and the other person has to think something's going down."

There were a lot of people watching the market, Mackenzie said.

"There's always a little bit of luck in these things too."

The people that were expected to trade during the first few weeks were global dairy processors or purchasers.

Farmers were not expected to be involved from the start but would benefit without having to trade.

"That forward looking information is extraordinarily valuable to farmers."

The futures contracts would be settled in cash, rather than products, using Fonterra's online auction globalDairyTrade to determine price.

Speculative traders typically did not join such markets on day one but were an important supplier of short-term liquidity.

NZX chief executive Mark Weldon said: "In terms of building a broad and robust capital market, this really is the final piece of the puzzle. It should provide - over the medium term - a real catalyst for employment and skills to be built into the New Zealand capital market."

Futures traded on other exchanges included lean hogs, frozen orange juice, coffee and sugar.

Mackenzie said capital was global and would go wherever there were good products.

"Having a global dairy product that people from around the world want to trade that is actually going to attract investors to our market."


See the Dairy Futures website here.

WHAT IS A FUTURES CONTRACT?

* A tool for managing risks to price and cost in a volatile environment.

* Potential users include milk processors, manufacturers and futures brokers.

* NZX dairy futures contracts will be settled in cash.

HOW DOES IT WORK?

* A company buys (for example) a futures contract for $2500 a tonne due for settlement in a year.

* If the final settlement price increases to $3000 a tonne as determined by real market prices, then the company makes a cash gain of $500.

* The physical product the company needs to buy costs $3000, so the cash gain enables it to effectively buy the product at $2500.

* Without a futures contract the physical product could have cost the company more than $2500 a tonne but if the price had dropped it could have bought the product for less.