Definition

NZX Dairy Derivatives

The New Zealand Stock Exchange (NZX) is the prime market which deals in equity, debt and derivatives markets in New Zealand. Further, it manages the global dairy derivatives market, which offers futures and options contracts.

What is NZX Dairy Derivatives?

New Zealand is renowned for its dairy products across the globe, and dairy is the biggest export goods sector in the country. NZX Dairy Derivatives Market caters to the dairy industry by offering a forward view of dairy prices, as well as provides a cash-settled instrument for efficiently and effectively managing the associated price risks.

As market participants in international dairy markets are susceptible to high-price volatility, this market offers various tools to reduce the vulnerability related to the prices of the dairy products to the market participants.

Summary
  • Established in 2010, NZX Dairy Derivatives Market provides the market participants across the dairy production chain to effectively manage the price volatility associated with the global dairy markets, and the transactions are settled through cash.
  • The most traded derivatives contracts on NZX Dairy Derivatives Market include Whole milk powder (WMP) Futures and WMP Options contracts.
  • SMP (Skim Milk Powder), BTR (Butter) and AMF (Anhydrous Milk Fat) are other derivative contracts across the country’s dairy derivatives market.

Frequently Asked Questions

Is there a need for the Dairy Derivatives Market in New Zealand?

Dairy is one of the most dominant export goods sectors of New Zealand. The NZ dairy farmer is exposed to high-price volatility as nearly 95% of the total milk produced in the country is exported, and these farmers are dependent on the constant change in prices in global markets.

Moreover, both the sellers as well as the buyers of milk are on a lookout to work out ways to reduce this price volatility and maintain consistency on the prices paid or received for the products.

Hence, the need for a Dairy Derivatives Market arises to mitigate such price perils.

When was NZX’s dairy futures market launched?

The NZX started its dairy futures and options market in 2010 to provide effective tools to its potential traders, which include farmers, dairy trading firms, and manufacturers, etc.

In February 2011, SMP and AMF futures contract were introduced, followed by WMP options toward the end of 2011. And, in 2014, BTR futures was launched. Moreover, the NZX has also started with NZ Milk Price Futures (MKPF) and options contracts in 2016.

What kind of contracts are offered by NZX Dairy Derivatives Market?

The NZ Dairy Derivatives Market offers numerous futures and options contracts by the NZ farmers via the international buyer of dairy commodities. The whole milk powder (WMP) is New Zealand’s chief dairy commodity and WMP Futures and WMP Options contracts the most traded derivatives contracts on the NZX.

Other such contracts include SMP (Skim Milk Powder), BTR (Butter) and AMF (Anhydrous Milk Fat).

How are NZ dairy framers paid for the milk supplied by them?

The rates given to the NZ dairy framers for the milk supplied by them to the dairy processors is directly based on the prices prevalent in the global dairy markets. Characterised by constant price variations, the global dairy market faces high price fluctuations. Hence, NZ Milk Price Futures and Options contracts help the dairy farmers by lowering down the risks pertaining to the milk price.

What are derivatives?

The major stock derivatives being traded in a stock exchange comprise futures and options. They are contracts where investors trade in stock assets at a predetermined price on a specific future date.

They try to hedge market risks by locking the price well in advance.

A futures contract offers buyers or sellers to trade in an underlying stock at a predetermined price on a specific future date. In contrast, an options contract, as the name suggests, provides traders/investors the right/opportunity, but not the obligation to buy or sell the stocks at a pre-agreed price on any given time.

What are dairy futures?

Dairy futures, also known as milk futures, are agricultural futures that are traded on a stock exchange. The most common dairy futures on the NZX are WMP Futures, SMP Futures, AMF Futures, BTR Futures and MKP Futures.

How are NZX dairy futures traded?

The transactions on NZX dairy futures are settled in cash, and no physical delivery of the product is there. In other words, the price variance between the amount at which the trade is entered and the final settlement price is settled through cash.

This reduces credit risk and gives enhanced flexibility, and at the same time, facilitates more volumes from hedgers as well as speculators.

What is the pricing benchmark for dairy commodities?

The global dairy industry considers ‘Global Dairy Trade’, as a virtual trading platform for globally traded dairy commodity products for the pricing benchmark.

Fonterra Cooperative Group owns Global Dairy Trade; however, the latter runs its operations independently. Since its formation in 2008, Global Dairy Trade has sold almost 8 million metric tonnes of dairy products to date through GDT events.

GDT events are conducted twice a month, which provides products related to the dairy sector from well-known suppliers worldwide, which tends to draw many registered bidders.

Is there a duration for the NZX dairy futures contract?

WMP, SMP, BTR and AMF are monthly contracts, which expire every month and are available for trading for 18 months. Similarly, WMP and SMP dairy options are also monthly contracts but are available for trading for 12 months. On the other hand, NZX NZ Milk Price Futures (MKPF) and Options (MKPO) contracts are annual contracts, which expire in September and are available for trading for five years.

How can one trade in NZX Dairy Derivatives Market?

Futures and options contracts are provided by the NZX for every level of market participant belonging to New Zealand farming community through to the global buyer of commodities related to the dairy sector.

New Zealand’s Exchange is the marketplace which enables the trading of futures and options amid participants. NZX network or internet VPN could provide direct access to the market but would require official approval as the NZX Derivatives Participant.