Consultation on potential futures market welcomed

Consultation by NZX to create a New Zealand futures market is being welcomed by Federated Farmers.

“Federated Farmers is yet to form an opinion but looks forward to engaging with NZX on its proposed futures market,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.

“While most countries have a stock exchange, there are only about 23 major commodities exchanges with a specific agricultural focus. Many will have heard of the Chicago Board of Trade, but the Malaysia Derivatives Exchange, or MDEX, is probably a better model.

“We also note that NZX is looking to launch with Whole Milk Powder (WMP) but this raises further questions about Fonterra’s GlobalDairyTrade.

“We remain very concerned with GlobalDairyTrade. Globally, soft commodities like palm oil, soy and coffee, have bounced back after last year’s price rout. Yet in May, WMP started declining again and well before US dairy subsidies were announced,” Mr McKenzie added.

In the last month alone, there has been a 12 percent reduction in the USD price of WMP sold on GlobalDairyTrade, while the NZD/USD cross rate has risen by around 12 percent. This has created a huge change in the price of a major New Zealand’s export commodity.

“Unless GlobalDairyTrade is stopped, a futures market may be the only way to manage this significant risk to farmers’ incomes,” Mr McKenzie added.

“Federated Farmers knows there were attempts to create a wool futures market in the 1980s and 1990s. That market collapsed due to a lack of volume. The same thing seems to have afflicted recent attempts to create a futures market based on equities.

“Futures markets, done well however, create price certainty by way of hedging risk. Past experience tells us of the need to have a broad range of commodities to create market depth as well as volume.

“It seems tailor made for New Zealand given we are the world’s largest exporter of sheep meat as well as the second largest dairy exporter on earth. We think there’s ample scope to look at a number of other tradable commodities.

“Ultimately, Federated Farmers support or otherwise will depend on commercial analysis telling us this is a good thing for farmers,” Mr McKenzie concluded.