Trading update
In Q3 83,222 contracts were traded, up 125% on the previous corresponding period (pcp). Whole milk powder (WMP) futures continue to lead the charge representing 59.5% of total volume traded over the quarter, more than 200,000 WMP futures contracts have now traded since the contract launched in October 2010. Just over 20,000 options contracts traded in the quarter; 68.9% (or 14,040) were put option contracts and 31.1% (or 6345) were call option contracts.
- Fats (AMF and butter) volume +551% on pcp
- SMP volume +293% on pcp
- Average daily volume (ADV) traded during the quarter was 1280 contracts
- There were 1203 trades during the quarter (~19 a day)
- The most active trading day was on August 12, 2015, when 5994 contracts exchanged hands
- Open interest at quarter end was 50,661 contracts (26,626 futures and 24,035 options)
Market Access
Straits Financial LLC was accredited as a derivatives trading and advising participant and general clearing participant in September. Straits is a significant provider of services to agricultural hedgers in North America including many dairy customers, while Straits’ Asian business is far and wide, with customers throughout China, Indo-china and Southeast Asia. Read the full NZX announcement here.
HighGround Dairy is now offering full-service trading access through Straits Financial. HighGround Dairy launched in 2012 and services all those interested in trading dairy futures and options markets. Through the brokerage division and its related consulting company, HighGround Advisory Group, it specialises in dairy hedging, risk management and market analysis services for farmers, co-operatives, processors, manufacturers, distributors, traders and end-users. Read the full announcement here.
AgriHQ market outlook
Dairy commodity markets are expected to continue to firm in the coming months as global milk supplies tighten. There is a strong expectation New Zealand’s milk production will fall in the 2015-16 season. AgriHQ forecasts a 3% drop in milk output this season. The number of cows in milk during the peak production months of October and November is expected to be 1-2% lower than last season.
Production per cow is likely to be negatively impacted by lower feed intakes. Pasture production has been hampered by cold wet weather, which has slowed early season output. Milk production across the summer months may also be lower than usual should the El Nino conditions currently present result in a summer drought. A large scale drought is not currently factored into the AgriHQ milk production forecast. As New Zealand farmers currently face their second season of low milk prices most can’t afford to offset any shortages in pasture through extensive use of supplementary feeds.
The strength of the global markets for milkfat products means manufacturing decisions typically favour SMP and butter over WMP. This means the global supply of WMP is likely to tighten in the coming months. Less WMP is being manufactured in Europe and Australia due to the strength of their consumer markets for milkfat products, while milk supply slowing in New Zealand will restrict its WMP output. Demand for WMP has been subdued due to China importing lower volumes but should this trend reverse then there is potential for WMP markets to firm quite quickly. The spread between WMP and SMP is wider in the later dated NZX Futures contracts than the nearby contracts. This gap could widen further if New Zealand’s milk production slows further due to a dry summer.
Susan Kilsby
Dairy Analyst l Agri HQ
P: +64 27 296 2894
E: susan.kilsby@nzx.com
- Susan Kilsby manages AgriHQ's dairy information, a role she has held since 2006. AgriHQ provides market intelligence to leading dairy market participants via reports and online tools. Susan has an extensive understanding of the operation of the dairy industry from farms through to the global markets gained from her lifetime involvement with the dairy industry. Susan is the keynote speaker at NZX’s Global Dairy Seminar in Singapore this November.
Broker chat
This quarter we hear from HighGround dairy president Eric Meyer who provides an update on the global dairy market:
These have been exciting and emotional times to be following global dairy markets. Over the past two and a half years, milk powder prices reached an all-time high (April 2013) on aggressive China buying combined with a global shortage of milk. And just three months ago, both New Zealand WMP and SMP prices sunk to a 13-year-low on an abundance of supply and excessive stock. But from the lows made in early August, GlobalDairyTrade prices have staged a massive rally which has increased the value of WMP by 92% and SMP and AMF by 73%!
As New Zealand dairy farmers braced for a brutal 2015-16 seasonal outlook by accelerating culling and cutting back on supplemental feed purchases this summer, a lingering winter stymied production much earlier than expected. Fonterra reported August milk collections 2.5% below prior year and have prognosticated an 8-10% decline in September. Add the timing of global dairy buyers looking to lock up long-term contracts at extremely low prices and the powder keg was quickly lit.
So where do global dairy prices head now? No one can crack that mystery, but what we do know is there that is plenty of uncertainty as to what may happen in the near future. The 2015-16 New Zealand milking season is off to a poor start, which could be made worse by an El Nino that dries out pastures later this season. Farmgate milk prices did not hit rock bottom in either the United States and throughout Europe, which has kept cows producing plenty of milk. Removal of EU quotas in April along with extremely favourable climate conditions across most of the globe have helped keep the pedal down on milk flows as well in 2015.
From a demand standpoint, China has not returned with the vigour they had in 2013-14 and other countries have yet to close the gap. Russia has also pulled back on dairy imports as well. Pipelines have been refilled in many major importing regions but the question still remains if there has been significant incremental demand growth in the midst of lower revenues from oil sales, devalued currencies in developing countries amongst a challenging global macroeconomic outlook.
That said, buyers have been and continue to remain nervous about supply shocks and have taken action over the past two months to increase their forward purchases. With all this uncertainty, the global dairy market is finding its way back to five year averages and quickly left the extreme lows in the dust.
For nearly 20 years, dairy farmers, co-operatives, processors, traders and end-users in the United States have been utilising hedging tools available at the Chicago Mercantile Exchange (CME) to mitigate this kind of volatility out of their monthly milk cheque or the price they pay for cheese, butter, milk, etc. CME futures and options markets have grown exponentially from their modest beginnings and continues to add new participants each year. US buyers and sellers that use these risk management tools have ‘solved the mystery’ of dealing with an uncertain future by being proactive – making or protecting their own margins or costs instead of taking what the market offers them which is becoming much more difficult to predict.
NZX Dairy Derivatives have seen tremendous growth over the course of the past 12 months, with volume and open interest on a stronger growth track than the CME during its early years. From our experience in the United States, education has been the key to unlocking the secrets of a more certain, less volatile and most important, less emotional future in an evolving and a more uncertain global dairy market. Ask HighGround or any of the NZX brokers or trading participants to help your company or farm get started.
