NZX will use the milk powder price in Fonterra’s globalDairyTrade auctions as the benchmark for its futures contract to be launched next year, says chief executive Mark Weldon.
The stock exchange operator had been weighing whether to use Fonterra or its weekly Agrifax prices as the benchmark. Weldon expects milk powder futures will be offered starting in April or May next year.
“Owning the price is an important strategic asset in any market,” Weldon told BusinessWire. “We’re pretty happy to do things that are good for Fonterra if we can.”
New Zealand is “a very large player in terms of global traded product, which is really the only global price,” he said. “The underlying information around the global tradable price really is New Zealand information.”
Under Weldon, NZX has expanded from its original focus on stock and debt listings to include wholesale electricity prices via the M-co platform, agricultural data from Agrifax, grain trading in Australia and a range of specialist rural media assets.
In June it announced plans to launch a cash-settled futures contract aimed at allowing participants in dairy products trading worldwide to hedge price risk in the whole milk powder market. New Zealand supplies about 40% of the global market for whole milk powder.
Demand for hedge products – from farmers and dairy product processors has grown as volatility in prices soared. The NZX’s June statement said that prices for milk powder had risen and fallen 150% since 2005.
Fonterra’s online auction platform was developed and is maintained by CRA International, the U.S.-based consulting firm that has created a similar trading site for cranberry producer Ocean Spray.
Weldon said NZX would be interested in the opportunity of taking over globalDairyTrade though he’s had no discussions with Fonterra on the possibility.
“It is certainly something we would prefer to see located in New Zealand,” Weldon said. “It seems to make sense that a third party would run that so were there an opportunity we would probably put our hand up.”
Weldon said there is global demand for a cash-settled contract. Consumers such as Starbucks, the coffee chain, are “unable to hedge milk and milk is a bigger cost to them than coffee,” which can be hedged, he said.
Prices in Fonterra monthly milk powder auctions have surged 95% from their lows in July.