Wednesday, July 6, 2022

Dairy farmers look to the future

Dairy futures and options are growing quickly as dairy commodity prices are high and alternative equity and foreign exchange markets cope with higher inflation and interest rates, Singapore Exchange (SGX) head of commodities William Chin says.

Chin said the partnership between SGX and NZX in dairy derivatives had gone very well over the first six months. 

It began operating in December with the expectation of scaling up market access and liquidity.

“Our exchange footprint in Asia combined with your dairy expertise is working well.

“The numbers of clients and brokers using NZ dairy futures and options have doubled in the six months and contract volumes have expanded exponentially.

“But the partnership is still young and when you know that only 10% of New Zealand’s physical market in dairy commodities is hedged with futures, you realise the potential for growth is huge.”

Chin pointed out that some of the metals futures markets are many times the size of the physical markets and therefore dairy had a long way to go.

NZX head of derivatives Nick Morris says the market recently registered over 100,000 open interests which is a milestone for dairy derivatives in this country.

Among the reasons he cited turbulent times in world commodity markets, high milk prices encouraging farmers to manage their risks and the developing partnership between SGX and NZX.

“The prices are very attractive and we are seeing a maturity in farmers using these products and as they learn how they work they use more advanced risk management tools like options.”

“Only 10% of New Zealand’s physical market in dairy commodities is hedged with futures and the potential for growth is huge.”

William Chin
Singapore Exchange

Chin says more money was flowing towards futures markets from foreign exchange and equities because of higher inflation and interest rates.

“We are seeing massive interest in having commodities and their derivatives within investment portfolios.”

He explains that purchasers of dairy futures, particularly milk price futures, were financial investors without a stake in the physical dairy markets.

However, the derivatives must have their feet firmly in the physical markets for the credibility of price discovery and the possibility of futures contract settlement if required.

NZX and the European Energy Exchange (EEX) are proposing to each take one-third ownership stakes in Fonterra’s Global Dairy Trade (GDT) platform.

This should boost the standing of the GDT as an independent, neutral, and transparent price discovery platform, giving it a presence in prominent international dairy producing regions, and creating future growth opportunities.

“We see the expansion of the physical trading environment as both further strengthening existing financial contracts and enabling the creation of new tools and opportunities for dairy processors and end-users to manage price volatility,” NZX chief executive Mark Petersen said when the deal was first announced.

Subject to clearance from various authorities and documentation, the partnership is expected to be completed shortly.

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