Friday, March 29, 2024

Smoothing out future prices

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NZX’s new milk price futures and options market launches later this month, allowing Kiwi farmers to lock in a milk price but how does it work, what are its benefits and what are some of the pitfalls to be aware of?
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The market has the potential to reduce farmers’ income risk and even out what have been highly volatile returns with many seeing it as an alternative to Fonterra’s now-scrapped guaranteed milk price (GMP).

While GMP drew criticism from some for being somewhat complex – particularly when it came to the process for securing a contract – there’s no doubt what farmers now have in the new futures and options contract takes that complexity to a whole new level. So it’s not going to be for everyone, and even those with a vested interest in it are quick to point out participants must be comfortable they understand it and be fully aware of the possible outcomes before they make a trade. Farmers will be able to trade a futures or options contract only through an accredited or approved company, with those companies obliged to ensure their clients understand the contract.

Currently there are two NZ-based firms accredited to participate in the NZX derivatives markets – First NZ Capital and OMF – and several international firms.

Accredited firms will be listed on NZX’s website. Mike McIntyre is head of derivatives at First NZ Capital, and says while it’s early days the farming entities he’s talked to see the new milk price futures product as an appropriate price risk management tool and are working on coming to grips with the details.

There’s also an increased awareness that NZ dairy farmers, and in particular Fonterra suppliers, are wide open to milk price volatility.

Lifting the level of understanding specifically around the new milk price futures and options products as well as raising general awareness of how the markets operate is imperative, he says.

OMF director of financial markets Nigel Brunel says he’s fielding several phone calls daily from farmers wanting more information and describes the level of interest as high.

Some had used Fonterra’s GMP but there were plenty who hadn’t. Some were large-scale enterprises and some were smaller.

The Fonterra Shareholders’ Council nationwide Grow Your Minds seminar series last month piqued farmers’ interest in price risk management and had many seeking further understanding of how futures and options could be used as a tool. Brunel says OMF will be running seminars around the country for farmers interested in learning more, starting with seminars held twice daily at the Fieldays at Mystery Creek in June.

More: Check out https://www.farmersweekly.co.nz/milk-price-derivatives/

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