NZX takes a punt on milk futures

By DENISE MCNABB - The Independent | Friday, 12 September 2008

Sharemarket operator NZX plans to launch a derivatives trading platform in March, kick starting it with  milk futures and energy options, among other instruments. 

NZX officers will have their first meeting about the platform tomorrow with futures market experts, traders, bankers and brokers.

The market will use the same NZX-developed technology as it is using for its carbon credit derivatives market TZ1.

NZX chief executive Mark Weldon said yesterday a derivatives or futures market would give traders another product "which helps them to be financially healthy throughout a cycle and differentiates them from other markets in choppy times".

"A lot of people have cash to trade. We've seen a dearth of IPOs globally so we are a lot more cognisant of having this trade."

Weldon said a futures market would have been helpful for trading equity options during the protracted partial takeover bid for Auckland International Airport. 

He pointed to "Telecom with its shenanigans" and the  Sky City takeover that did not happen as other missed trading opportunities.

If milk futures came it would be "very material to the NZX", Weldon said, because New Zealand was the world's biggest exporter of milk so had a reputation as a global milk producer.

"Look at Fonterra's milk price falling $1500 a tonne in the past two months," he said. "There is huge volatility in milk around the world." Fonterra sells 40% of the world's whole milk and the powder trade is very, very big. "For brokers and bankers milk could be fundamentally transformative."

Weldon said the new NZX platform would help address the global "reference price problem" for milk trading to date. 

He said true pricing would be easier because Fonterra was running a weekly option for whole milk powder, even though the results were being kept private.