September 20, 2012

New Zealand stock exchange operator NZX sees opportunities to expand its offerings to include an additional dairy derivative and perhaps a red meat product.

NZX chief executive Tim Bennett told the Wall Street Journal in an interview that the company expects to launch a milk solids derivative within six to 12 months that will allow dairy farmers to hedge the prices they are paid for their milk.

"What farmers are really after is some ability to have a fixed price exposure to the milk price," Bennett said.

Fonterra Dairy Co-Operative Group continually forecasts how much it will pay its 10,000 farmer-shareholders for their milk, but the forecast often fluctuates significantly, making it challenging for farmers to plan their budgets. The exchange's new milk solids derivative will enable dairy farmers to lock in prices in advance.

The new product will help farmers establish more certainty in their finances, and the exchange will make the product simple to understand and use, Bennett said.

The NZX already operates the world's first cash-settled market for dairy futures, meaning participants don't have to risk having to make--or take--delivery of a product. It offers twice-monthly GlobalDairyTrade Internet auctions as a reference for cash settlement for whole milk powder, skim milk powder and anhydrous milk fat contracts.

NZX also sees an opportunity to create a red meat derivatives product because there is so little transparency in the pricing of red meat due to the lack of a standard product, Bennett said.

Red meat--including lamb, hogget, beef and veal--is New Zealand's second-largest export product, accounting for around NZD5 billion (US$4.1 billion) annually, but it is priced by individual buyers and sellers.

The industry would need to first agree on a standard product, which would enable the creation of a price index and either swaps or an over-the-counter market, Bennett said.