Dairy futures trading hits 10,000 mark

Dairy futures trading is nearing critical mass, says the NZX, with the 10,000 trade mark being passed today. Photo / Sarah Ivey

Trading in NZX dairy futures passed the 10,000-lot mark today for the first time since its inception.

The exchange says the milestone means the market is well on the way towards reaching critical mass.

Futures markets allow buyers and sellers in the physical dairy market to hedge their purchases or sales, while providing an opportunity for speculators to take a punt on dairy prices.

The NZX's head of derivatives, Kathryn Jaggard, told APNZ the market, which kicked off in 2010, had exceeded the NZX's expectations.

Jaggard said new derivative markets can take two to five years to develop into what she calls "super liquid" futures contracts, and she said the NZX dairy futures market was getting close to that.

She defined "critical mass" as being 150 lots a day, compared to about 130 a day at present.

"It's established and very tradeable, so yes, we are very close to getting that critical mass," she said.

The first 5,000 lots were traded in the first 12 months and the last 5,000 were traded in the last six weeks.

"You start to get exponential growth, which means that you can go from 150 lots a day to 1,000 a day in much shorter time compared with the time it took to reach the 5,000 lots," she said.

Volume grew gradually over the 12 months since NZX whole milk powder futures were launched in October 2010, hitting 5,000 after one year, she said, showing the market is broadening and deepening.

The next 5,000 lots followed quickly, helped along by a surge in the number of lots traded in anhydrous milk fat futures, launched in February 2011.

The market has been supported by global futures firms, including FCStone, LLC and BNP Paribas.

Earlier this year, local firm OM Financial joined the market. The most recent addition was First NZ.

NZX chief executive Mark Weldon said the dairy futures market was key to the exchange's strategy.

"It is a globally relevant product that is attracting participation from all around the globe to our markets."

In addition to the existing suite of dairy futures contracts, NZX whole milk powder will start trading at the end of this month.