NZX eyes US investors thirsty for dairy derivatives

File photo / Kenny Rodger

NZX, New Zealand's market operator, has taken another step towards expanding its dairy derivatives market into the US with approval to allow direct access for American customers.

NZX is now a registered Foreign Board of Trade under the US Commodity Exchange Act, allowing US investors' direct access to trade in New Zealand dairy derivatives. Whole milk powder options and futures, skim milk powder and anhydrous milk fat futures have traded on the NZX since October 2010.

New Zealand is the world's biggest dairy exporter, with exports of milk powder, butter and cheese climbing about 17 per cent to $13.4 billion last year. Trading of NZX dairy futures, though fast growing, is still relatively small, with 36,748 lots changing hands in 2013, up 52 per cent, and open interest positions as at Dec. 31 of 9,070, up 316 per cent.

"In the scheme of things it's doing very well," Kathryn Jaggard, NZX head of derivatives, told BusinessDesk. "It takes two, five, 10 years to become fully mature."

She said the market operator has "a five-year view" on getting to a level of good liquidity. "We are in a good position, currently around 200 lots a day. We'd certainly like to get 500 lots a day, and 1,000 in the future."

So far, NZX's derivatives are faring relatively well. Just 20 skim milk powder futures contracts have traded on the London Futures Exchange since they were launched in October 2010, she said. The Chicago Mercantile Exchange delisted its skim milk powder contracts in 2010.

Last year the NZX extended its derivative market's trading hours to cater for international customers.

Jaggard said it was a great opportunity for New Zealand to become not only the leader in dairy exports but also the financial hub of dairy trade.

Futures are typically used to help smooth out price volatility, functioning as a binding contract to buy or sell a product at a fixed price at a certain point in time. The NZX contracts are for cash settlement.

Over the past year global demand for dairy has grown, particularly in Asia where growing populations and wealth has seen a thirst for milk and dairy products. In the last GlobalDairyTrade auction on Jan. 21 prices for skim milk powder gained 32 per cent from the start of last year, to US$4,698 a tonne. Whole milk powder rose 55 per cent to US$4,943 and anhydrous milk fat was up 55 per cent to US$5,641 a tonne.

Shares of NZX rose 1.6 per cent to $1.28 today.