ASB has published a paper on the performance of NZX Whole Milk Powder futures to raise the potential merits of consolidating financial instruments currently available to those industry participants seeking to manage their risk.
In 2010 NZX launched a dairy derivatives market to provide tools for farmers, producers, manufacturers and others to help manage exposure to price changes, and support the growth in the global dairy market. WMP futures were launched in October 2010, followed by SMP and AMF futures, and WMP options in 2011. ASB now suggests WMP futures is the strongest candidate to create a more liquid market.
“WMP futures are performing well, while other products are not developing as fast. We believe there is potential for WMP futures to become the benchmark for dairy”, Penny said.
WMP futures currently meet most of the criteria needed for a successful futures contract, but lacks the ease of transacting that would justify a “liquid” tag. A more liquid product would mean participants could transact meaningfully sized parcels in short time frames.
The paper suggests the reason for WMP futures’ likely success is due to WMP relevance to the growth in global demand. Future new consumers of milk do not live near dairy-producing regions, and WMP steps around the perishability problem that is more pressing as cow and consumer are separated by greater distance.
ASB anticipates a well-functioning WMP futures market would better benefit processors (milk collectors) and consumers (food processors) with both being able to commit to forward quantities without setting a price. WMP could also become the basis for fixed or floating price contracts.
ASB acknowledges small steps are required to create a stronger product – there is no quick solution. As part of those steps, ASB’s initial recommendation is for a reduction in the number of contracts offered within a year as a potential means to better aggregate liquidity.
“Part of the paper’s purpose is to stimulate a discussion. We have proposed one improvement, but we expect other suggestions to materialise that would help create a benchmark product to satisfy the growing needs of existing and new industry players”, Penny said.
