Dairy farmers are flocking to the SGX-NZX dairy derivatives market where milk price futures for the 2023 season are currently trading above $10/kg milksolids.
After paying brokers’ fees and leaving a margin deposit or bond in their Singapore Exchange account for the duration of the contract, farmers can lock in that income over some or all their expected milk production.
That compares very favourably with the current physical market payout predictions of $8.75 to $10.25 from Fonterra and $9.50 from Synlait, lifted 50c last week.
Not surprisingly, the very high payout forecasts have prompted more dairy farmers to hedge some of their milk income and fix a portion of production with milk price futures contracts.
NZX derivatives analyst Matt Manning highlighted the 14,000-plus open interest positions in the MKPU23 contract (milk price futures for the 2023 season), overtaking the 13,000-plus positions for the MKPU22 season.
The 2022 season milk futures contacts are two months from being settled, when Fonterra declares the final milk price for the dairy season just ended.
Fonterra’s guide is currently $9.30 and the MKPU22 futures market is sitting at $9.36.
The 2023 contract, which won’t reach settlement time until mid-September 2023, has about 14 months left to run.
The futures market price is currently $10.15, having fallen from $10.40 after the latest GDT results.
“To see the MKPU23 open interest number go beyond the MKPU22 tally already shows how the use of milk price futures by farmers is growing strongly,” Jarden’s head of derivatives Mike McIntyre said.
“It is great to see the accelerated uptake by farmers of this excellent hedging tool.
“It shows a greater understanding of the products and a greater maturity in the derivatives market.”
Each contract sold by a dairy farmer using their futures broker covers 6000kg of milksolids; therefore 14,000 open contracts represent 85mkg, around 5% of the national annual milk production.
Open interest means an active contract that has not yet been cash settled, which does not usually happen until mid-September in the case of milk price futures.
McIntyre was not prepared to forecast how many more milk price futures contracts would be traded for the 2023 season in the 12 months yet to come.
“The market is building strongly but compared with the volume of New Zealand’s milk production we have a long way to go.”
In more mature commodities futures markets in the United States and Europe, farmers commonly hedge prices for all of their anticipated production.
Each futures contract is marked to market on a daily basis and should the milk price futures market now fall, farmers who sold those $10.40 contracts gain a benefit in their accounts, which ultimately offsets any fall in the physical payout in September 2023.
Right now, the conditions for hedging part or all the milk income have never been better from the standpoint of farmers.
McIntyre said Jarden would provide help to any dairy farmers interested in learning about and using the futures market.
