Over the last 50 years the global dairy industry has experienced a transformation, moving from a stable low risk environment to one of unprecedented volatility. The New Zealand dairy farmer is at the forefront of this volatility transformation where 95% of milk is exported and farmers are exposed to the ups and downs of the global market. Both producers and purchasers of milk products are increasingly seeking ways to create certainty around the price they receive or pay for product.
Trade in dairy products is dominated by a few particular dairy commodities: Fresh Milk (MKP), Whole Milk Powder (WMP), Skim Milk Powder (SMP), Anhydrous Milk Fat (AMF), Butter (BTR) and Cheese. Of these, WMP and SMP are the most basic and important. Nearly half of global WMP exports come from New Zealand.
Price volatility creates risk for all market participants. This volatility is expected to continue, driving demand for a set of risk management tools that offer dairy participants globally the opportunity to create price certainty.
In particular, New Zealand dairy farmers have historically had limited risk management tools available to them, putting them at a disadvantage to their overseas counterparts. New Zealand milk price futures and options contracts can help farmers to mitigate the risks associated with a variable milk price.
NZX’s Derivatives Market provides the dairy industry with a forward view of dairy prices and a cash settled instrument for managing price risk simply and efficiently.