Dairy futures trading taking shape

The development of the world's first global dairy futures market could cement New Zealand's position as an industry leader, NZX says, but there are doubts that farmers will have the financial sophistication to use it.

Sharemarket operator NZX is designing the futures platform to help world dairying players manage their risk in increasingly volatile markets.

NZX head of traded products Fiona Mackenzie says dairy commodities are unique in that unlike cocoa, wheat, sugar or coffee, they do not have a futures mechanism to help protect players exposed to price movements.

Because dairy prices have historically not been particularly volatile, there hasn't been a push to start a futures market.

However, the ANZ Commodity Price Index for dairy products more than doubled between August 2006 and November 2007, before dropping 58.4 per cent by February this year.

The Chicago Mercantile Exchange offers skim milk powder and liquid milk futures contracts but Mackenzie said neither helped management of global price risk.

NZX plans a suite of dairy derivatives, the first being whole milk powder (WMP) contracts. New Zealand, through dairy giant Fonterra, is a 30 per cent player in the global WMP market.

The new derivatives platform, expected to start in November, is a "pretty sizeable" capital investment for NZX, Mackenzie said.

She was excited about its potential contribution to the economy, noting Chicago's booming growth in jobs and financial infrastructure and industry after the "gateway to the mid-west" became the agricultural futures capital of North America.

The platform would also "further cement our dairy industry as a global price setter", she said.

"Clearly we dominate in the dairy industry, but those sorts of advantages won't continue forever unless you cement and reinforce that position of strength."

Fonterra had been consulted by NZX and was supportive of the futures trading concept, but had yet to see details, said head of global trade Kelvin Wickham.

"I can see their intent, and why shouldn't New Zealand take a lead role ... but to get this going needs the participation of buyers and sellers and the dairy industry on a global basis.

"The advantage they [NZX] have is that they are trying to do something global. Not America-centric or EU-centric. New Zealand should be very supportive if we can attain that position. But we are not going to be the only ones trying to do that."

Fonterra would consider using the NZX platform and could refer its customers to it, to help them manage risk.

Fonterra Shareholder Council chairman Blue Read said many farmers would not have the "financial sophistication" to be interested in futures although an increasing number of corporate farms could be.

Veteran dairy farming leader Charlie Pedersen said he had yet to meet a farmer who would take a forward market position even while "grizzling" about Fonterra's currency hedging policies.

Mackenzie said investor education would be needed.

In Asia and Continental Europe where stock exchanges had "spent years educating people about them, derivatives are used a lot".

The big question facing NZX is what to use as the reference price point - the weekly market findings of its own subsidiary Agrifax or Fonterra's new global internet auction.

Agrifax, a 20-year-old primary markets survey and analysis company acquired by NZX three years ago, offered a weekly snapshot of global markets which was "a huge advantage" when Fonterra's auction Global Dairy Trade was monthly, said Mackenzie.

But Fonterra's Wickham said Agrifax data would have "less credibility".

"Any futures platform relies on a robust underlying reference price. Physical sales happen on Global Dairy Trade and physical sale is the stronger signal."

Mackenzie does not think the use of an NZX subsidiary would be a bad look.

"In fact, it would be an advantage because no one else could launch a project off Agrifax," she said.