Friday, March 29, 2024

OMF New Zealand Dairy Futures report – October 14, 2013

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Curve plays begin We saw the first true curve play Friday in WMP when the December to April spread traded at -$500.  We expect further trades to happen as many start to realise the steepness of the backwardation is too attractive to ignore.  Given markets are often in contango; where the futures months are higher than spot.  The backwardation in NZX dairy is attractive on several counts. The cash and carry is currently inverted.  Normally you would see futures trade at a premium to spot based on the financial calculation on the cost to carry spot to the next futures month.  At 5%, 30 days carry on $5000 would equate to $20.  So the 5-month forward based on this should be priced at $100 over spot, not a $500 discount. The steepness of the WMP curve is attractive to those holding in-the-money front month positions.  The opportunity here is to take profit on current positions and move them down the curve. We do expect the curve to flatten at some point – looking at the WMP contract on a historical basis – it’s hard to see a negative difference of $500 being maintained in the current curve. Sell December/ Buy April at $500 or better. CLICK HERE TO DOWNLOAD THE FULL REPORT  
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