NZX milk futures gain traction after slow start to trading

After the past two sub-par seasons, there was demand for the product from farmers looking to lock in prices.

Trading in the NZX milk futures, introduced in late May, has gained traction after a slow start.

The contract, which picked up where Fonterra's guaranteed milk price left off, was trading last week at $4.50 for September 2017 - a 25c premium to the co-operative's current $4.25/kg farmgate milk price.

Kathryn Jaggard, the NZX's head of derivatives, said the first few months of trading had been encouraging. So far 938 lots, equal to 5.6 million kg of milk solids, had traded.

Jaggard said the market had matured a lot since a whole milk powder contract was introduced in 2010. "We have a good foundation of brokers and clearing members, and distribution to those who want to trade in these markets," she told the Herald.

After the past two sub-par seasons, there was demand for the product from farmers looking to lock in prices.

"The need for certainty is much greater and obviously the experience with the guaranteed milk price means people are more comfortable with the idea of managing risk," she said.

"At 50 to 100 lots a day we have exceeded expectations at this point."

Fonterra trialled its own fixed-price scheme, known as the guaranteed milk price or GMP, which allowed farmers to lock in some of their milk supply at a fixed price. Fonterra dropped the scheme last year.

First NZ Capital's head of derivatives Mike McIntyre said most futures contracts fail to gain sufficient support in the early stages.

"This has been a better start than we have seen in others," he said.

"There is a reasonable level of understanding among the larger corporate farmers but there have also been other farming systems that have been involved," he said.

At the futures price of $4.50, there was an expectation from buyers that the physical milk price would increase in the year ahead.