Dairy futures market wins endorsement from leading bank

File photo / Mark Mitchell

A dairy futures market launched by the NZX last month is leading overseas rivals and has won endorsement from international bank BNP Paribas.

Kathryn Jaggard, derivatives manager for NZX, said 55 contracts had been traded since the launch of the whole milk powder futures product. The number of trades was meeting expectations.

"I'm very pleased with it; I generally have a smile on my face and it seems to be going in the right direction," Jaggard said.

"Derivative contracts, they grow from a small base into a liquid instrument, unlike equity [initial public offers] that starts off with a bang and then levels out, derivatives contracts are what I call acorns that grow into tall oak trees."

NZX yesterday said international bank BNP Paribas would become a general clearing participant for the NZX Derivatives Market.

"It's excellent news, it's a real endorsement. The contract is seen as having real potential. BNP are a very large entity and very experienced in commodity markets."

The market was building well, she said.

"And now the contract is ticking over and every day we're seeing a very good market ... and I would say new inquiries on a daily basis from firms that want to open new accounts to trade the contract."

Physically delivered international skimmed milk powder contracts were launched by the Chicago Mercantile Exchange and the NYSE Liffe in May and October respectively, while the German Eurex exchange launched a cash settled skimmed milk powder contract in May.

"In terms of the number of lots traded we are leading the way," Jaggard said. "What you have in this contract is an incredible growing demand for dairy, particularly in developing countries.

"You have volatility in the market, you have a lot of participants who are looking to hedge their books. The futures market and the physical market are definitely moving together, which again is a very good sign."

FUTURES FACTS

What is a futures contract?
* A tool for managing risks in a volatile environment.
* A firm can use a futures contract to lock in a price.
* Potential users include milk processors, manufacturers and futures brokers.
* NZX dairy futures contracts will be settled in cash.