NZX set for dairy futures action

Photo /Brett Phibbs

Dairy futures trading starts tomorrow morning, putting the New Zealand Stock Exchange on a global stage.

NZX head of markets Fiona Mackenzie said the exchange had been working on the futures market for two years.

"Can you imagine being pregnant for two years?" Mackenzie said.

"It's that sort of thing, 'oh my goodness this has been such a long time in the making and it's actually here', so it's excitement."

See the NZX Futures homepage here.

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."

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," she said.

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

The final checks were under way and whole milk powder futures would be the first to launch, with plans for skim milk powder and anhydrous milk fat probably within three months.

"You think about New Zealand's global competitive advantage, dairy is really where it's at."

Potential users of the futures contracts included anybody with exposure to changes in dairy prices such as farmers, processors, manufacturers and dairy trading firms.

Contracts would range 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.

"You need to have sufficient volumes in the market to increase the chances that there's somebody at the same time that has the opposite view as you."

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

"For genuine hedgers to buy and sell ... you actually do want some speculative money in there because it just provides liquidity to keep the market moving."

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, she said.

Preparation for the market had taken its developers to cities including Singapore, Melbourne, Zurich and Chicago.

"You name it we have been out there meeting with people making sure we've got the right product," Mackenzie said.

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

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.