NZ-based broker bolsters futures market

The futures market aims to give dairy players more certainty over price. Photo / Alan Gibson

NZX's fledgling dairy futures market has landed its first New Zealand-based broker as trading volumes hit the highest level since its October launch.

NZX head of markets Fiona Mackenzie said OMFinancial had a long history as brokers of futures, foreign exchange, equities and carbon products and had been an NZX accredited futures and options firm since 2004.

"OMF's decision to join the NZX dairy derivatives market is another vote of confidence in a set of risk management tools that continue to become more liquid by the day," Mackenzie said.

OMFinancial had gained approval as an advising participant under the new NZX Derivatives Market rules.

Kathryn Jaggard, derivatives manager for NZX, said May was the biggest month for the market with 162 contracts traded so far, creating a total of 685 contracts since the market started in October last year.

"An unofficial rule of thumb in the futures market is that when you're doing about 5000 lots a day it's considered a liquid market," Jaggard said.

Futures contracts generally could take anywhere up to three years before they started maturing, she said.

"All we know is that right now things are tracking very well and certainly there's some very good foundations for a market to build into a very liquid one but how long that will take exactly could be months, could be longer."

Open interest was growing with a total of 423 contracts that had not yet reached settlement.

"There's more of that building in the further-out expiry months," Jaggard said.

"One of the key factors in measuring the health of a new derivatives contract and measuring the confidence that the participants have in the market - a significant measure is the level of open interest," she said.

OMFinancial head of financial markets Kevin O'Sullivan said many international buyers wanted to speak to people locally.

"Even for the basics of 'what's the weather like?'," O'Sullivan said.

"I guess they have more confidence in talking to someone in New Zealand ... than they do talking to someone in Chicago about what's going on in dairy [in] New Zealand."

It would be "great for the country" to have a proper derivatives market contributing to New Zealand's agricultural strength.

"The foundations are there for it to work and we deal closely with the NZX, with Fonterra, with our clearing partner. We're more at-the-coal-face people who are going to try to get the volume into the market."

The broker would first market the contracts to buyers of physical dairy product, then farmers and thirdly speculators.

"The key is we have to get the liquidity and the volume with the physical players up and then the speculators will come in."

The futures contracts are settled in cash using Fonterra's online auction GlobalDairyTrade to determine price.

"It's probably the best benchmark for dairy in the world."

FUTURES CONTRACT

* A tool for managing risks to prices in a volatile environment.

* A firm can use a futures contract to effectively lock in a price.

* NZX dairy futures contracts are settled in cash, rather than physical product.

* Potential users include milk processors, manufacturers and brokers.