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NZX plans to offer milk price futures

NZ NewswireNZ Newswire 5/04/2016 Tina Morrison

Financial markets operator NZX is developing a new market offering New Zealand dairy farmers a way to lessen the risk of volatile milk prices.

The Wellington-based company plans to start a futures and options market for milk on its trading platform, allowing farmers, processors and others linked to the local dairy industry a way to fix the future price of milk to reduce uncertainty.

The milk contracts will add to the NZX's existing futures contracts for whole milk powder, skim milk powder, anhydrous milk fat and butter, and its whole milk powder options.

Global dairy prices have become increasingly volatile over recent years as government subsidies and schemes propping up prices have reduced, allowing prices for more products to be set by the market.

For farmers, that's meant huge swings in prices, with Fonterra paying a record $8.40 per kilogram of milk solids in the 2013/14 season but just $3.90/kgMS in the current 2015/16 season.

"Dairy has opened up in terms of its trade and it has transitioned into a global commodity and is now experiencing similar levels of volatility as other commodities," said Kathryn Jaggard, head of derivatives at NZX.

"The development of these contracts is really in response to demand from dairy farmers and is a consequence of that continued volatility."

Fonterra trialled its own fixed-price scheme, known as the 'guaranteed milk price' the past few years, allowing farmers to lock in some of their milk supply at a fixed price.

However it canned the scheme last year, disappointing farmers such as state-owned Landcorp, the country's largest corporate farmer, which benefited from being able to plan its future operations knowing what the price for its production would be.

Larger dairy farmers are expected to be among the first to take up the scheme but NZX says the new market could also be used by processors to enable them to offer a fixed price contract to farmers, or by banks to launch a swaps contract.

The new contracts futures and options contracts are expected to launch in May.

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