NZX set for dairy futures action

Risk management is part and parcel with every business, and farmers try to handle this in many ways.

Conservatism is often labeled at farmers, but many find this risk management tool helps them cope with the ups and downs of the markets and weather. Some other management techniques used are in shelter, wintering barns, the amount of conserved supplementary feed, and use of scanning and ram harnesses to target animals most at risk. The amount of debt carried and cash reserves held for the unexpected outcomes also varies greatly amongst operators.

But when it comes to the market, farmers are often labeled "price takers" and often feel powerless to manage market risk. Currency hedging, income protection insurance, and stock contracts are all available, and maybe will be used more in the future as the "new financial climate" heightens the risk of volatility in the markets.

The futures market is new to agriculture in NZ, but is common overseas with other agricultural products, such as corn, pigs,and coffee. The launch of dairy futures for Whole milk powder tomorrow, will give farmers  better market information, and give bigger operators an opportunity to manage their market risks out into the future.

 Dairy futures trading starts tomorrow morning, putting the NZ Stock Exchange on a global stage. NZX head of markets Fiona Mackenzie said the exchange had been working on the futures market for two years reports The NZ Herald.

NZX chief executive Mark Weldon said: "In terms of building a broad and robust capital market, this really is the final piece of the puzzle. It should provide - over the medium term - a real catalyst for employment and skills to be built into the NZ capital market." "Having a global dairy product that people from around the world want to trade that is actually going to attract investors to our market," she said.

The final checks were under way and whole milk powder futures would be the first to launch, with plans for skim milk powder and anhydrous milk fat probably within three months. "You think about NZ's global competitive advantage, dairy is really where it's at."

Potential users of the futures contracts included anybody with exposure to changes in dairy prices such as farmers, processors, manufacturers and dairy trading firms. Contracts would range from one to 18 months, with buyers and sellers trading through a clearing house. For every buyer there must a seller to match and vice versa.

"You need to have sufficient volumes in the market to increase the chances that there's somebody at the same time that has the opposite view as you."Speculative traders typically did not join such markets on day one but were an important supplier of short-term liquidity. "For genuine hedgers to buy and sell ... you actually do want some speculative money in there because it just provides liquidity to keep the market moving."