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Market Derivatives in the EU Dairy Sector
The Challenge is not Regulation
3rd Meeting of the Expert Group on agricultural commodity derivatives and spot markets
18 June 2013
Market Derivatives in the EU dairy sector
• Introduction: Milk & Dairy Products
• Overview of available price risk tools
• Current usage of the tools
• What are the challenges?
• What are the opportunities?
Milk & Dairy Products
Milk fat
Insoluble protein
Soluble protein
Milk sugar
Milk minerals
Milk & Dairy Products
Cheese
Whey powder
Milk & Dairy Products
Butter
Skimmed
Milk Powder
Market Derivatives in the EU dairy sector
• Introduction: Milk & Dairy Products
• Overview of available price risk tools
• Current usage of the tools
• What are the challenges?
• What are the opportunities
Available Tools
• There is a wide variety of dairy futures and options contracts at various exchanges world wide.
• Chicago Mercantile Exchange contracts have been traded more than 15 years. Contracts on European (Eurex & NYSE Liffe) and NZ (NZ-X) exchanges are more recent.
• Both contracts with physical delivery and cash settled contracts are offered.
What contracts are available
• Chicago Mercantile Exchange
– Class III Milk
– Cheese – Cheese Spot Call Blocks
– Cheese Spot Call Barrels
– Dry Whey
– Class IV Milk
– International Skimmed Milk Powder
– Nonfat Dry Milk – Nonfat Dry Milk Spot Call Grade Extra
– Nonfat Dry Milk Spot Call Grade A
– Butter – Butter Spot Call
What contracts are available
• Eurex – EU Butter
– EU SMP
– EU Whey Powder
• NZ-X (New Zealand) – WMP
– AMF
– SMP
• NYSE Liffe – EU SMP
• OTC – Flexible contracts
Type of Contracts
• Contracts with Physical Delivery
– Open interest contracts at expiry date require physical delivery.
– Ability to cover future product needs
– High liquidity requirement
– Examples • CME International Skimmed Milk Powder
• NYSE Liffe EU Skimmed Milk Powder
– Main Issue • Physical delivery mostly undesirable in the dairy sector
Type of Contracts
• Cash Settled Contracts
– Open interest contracts at expiry date are cash settled against reference price.
– No ability to cover product needs
– Lower Liquidity requirement
– Examples • All EUREX contracts
• All NZ-X contracts
• CME Milk, SMP, Butter, Cheese & Whey futures
– Main Issue • Correlation of settlement price with physical market price
Market Derivatives in the EU dairy sector
• Introduction: Milk & Dairy Products
• Overview of available price risk tools
• Current usage of the tools
• What are the challenges?
• What are the opportunities
What is trading today Open interest (futures)
• CME: (24 months)
– 28 500 tons of SMP (2012 P: 900 000 MT) • 1.6 % of estimated 2 year production
– 100 000 tons of Butter (2011 P: 850 000 MT) • 6 % of E2Y production
– 100 000 tons of Cheese (2012 P: 5 000 000 MT) • 1% of E2Y production
– 29 000 tons of whey powder (2012 P 780 000 MT) • 1.9 % of E2Y production
– 2 000 000 tons Class III milk (AP: +/- 40 million MT) • 2.5 % of E2Yproduction
– 200 000 tons of Class IV milk (AP: +/- 10 million MT) • 1 % of E2Y production
What is trading today Open interest
What is trading today Open interest (futures)
• NZ-X : 18 months
– WMP: 890 MT Compare to NZ 2012 exports : 1 260 000 MT
– SMP: 565 MT Compare to NZ 2012 exports: 390 000 MT
– AMF: 414 MT Compare to NZ 2012 exports: 195 000 MT
What is trading today Open interest (futures)
• Eurex: 18 months
– SMP: 30 MT EU annual production 1 250 000 MT
– Whey powder: 125 MT EU annual production: 1 660 000 MT
– Butter: 990 MT EU annual production: 2 120 000 MT
Market Derivatives in the EU dairy sector
• Introduction: Milk & Dairy Products
• Overview of available price risk tools
• Current usage of the tools
• What are the challenges?
• What are the opportunities?
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
What are the challenges for dairy futures
What are the challenges for dairy futures
What are the challenges for dairy futures
What are the challenges for dairy futures
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– EU Farm gate milk price and commodity prices have limited correlation.
What are the challenges for dairy futures in the EU
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EUR/100 kgMilk Prices Evolution (up to February 2013)
LTO Weighted Average Milk Price * (standardized 4.2% fat)
Weighted EU Average (real fat content)
EU Milk Equivalent Price (based on EU SMP and Butter prices)
Source :MS’ communications under reg. 562/2005 & 479/2010 + LTO : Land- en Tuinbouworganisatie Nederland
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– Farm gate milk price and commodity prices have limited correlation
– Global market, EU market and US market are not (yet) perfectly aligned
What are the challenges for dairy futures in the EU
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SMP market prices
Premium
European SMP(€)
Oceania SMP (€)
What are the challenges for dairy futures in the EU
1.000
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Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
USD/t
World Market
EU
WMP Prices
© ZMB
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– EU Farm gate milk price and commodity prices have limited correlation
– Global market, EU market and US market are not (yet) perfectly aligned
– Settlement mechanism for cash settled contracts is not yet fully trusted
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– EU Farm gate milk price and commodity prices have limited correlation
– Global market, EU market and US market are not (yet) perfectly aligned
– Settlement mechanism for cash settled contracts is not yet fully trusted
– The majority of dairy products do not behave like commodities
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– Farm gate milk price and commodity prices have limited correlation
– Global market, EU market and US market are not (yet) perfectly aligned
– Settlement mechanism for cash settled contracts is not yet fully trusted
– The majority of dairy products do not behave like commodities
– Everybody is waiting for more liquidity to start trading
The opportunities for dairy futures in the EU
– Surplus milk after end of quota will be most likely priced
on commodities
– Contracts and settlement mechanism will improve • OTC serves as experimental market place
– Increased correlation with global markets • NZ-X and CME contracts becoming valid price risk tools for EU
market
– More experience and more trust • Dairy companies hiring traders from other sectors
Market Derivatives in the EU Dairy Sector
Thank you!
Bart Van Belleghem
Secretary General – Eucolait
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