OMF New Zealand Dairy Futures Report – October 8, 2013

Dairy curve steepens – opportunity to buy cheaper – later Normally, you would expect a curve in the futures market to be upward sloping – known as contango. It makes sense for spot to be lower than the futures because it costs money to hold spot and the futures should reflect this “cash & carry”. When you look at other commodity markets, like Wheat or Corn, you see a contango market. However not all markets are in contango, some are in backwardation such as the NZX Dairy market. This is where the curve is backward sloping,meaning spot is higher and futures months are cheaper. The question often asked is this bullish or bearish? The answer is often “well it depends”. If backwardation is occurring, where spot is trading higher than the futures, it would suggest there is some “desperation” in the market and buyers are clamoring to buy spot. This appears to be what we are seeing in dairy due to big demand coming from China in the spot market and this has caused the curve to steepen. For WMP it’s almost $800 tonnes difference between October (deemed spot) at near $5200 and April 2014 around $4400.  The opportunity is to start layering your future buying in April and increase if the market moves lower. There are two ways to play this (1) if the market moves lower, you are hedging your future buying well below current spot levels. (2) If we see the market move higher from here, you can always sell out your hedge at a profit and use that to lower your spot buying cost.