By Rebecca Howard
WELLINGTON, New Zealand--U.S. investors betting that a loosening
of China's one-child policy will boost demand for milk have won
access to directly trade dairy futures in New Zealand, the world's
biggest milk exporter.
New Zealand stock exchange operator NZX Ltd. said Monday it has
been registered by U.S. market watchdog the Commodity Futures
Trading Commission, allowing U.S. investors to trade options in a
range of milk products including whole and skim milk powder for the
first time. Previously, U.S. investors could only participate in
the NZX Dairy Futures Exchange via a third party.
It comes as foreign investors are increasingly seeking access to
the New Zealand's dairy industry as Asian consumers turn to
higher-protein diets, boosting global demand.
"What this does is open up a whole new section of the market in
terms of customers wanting to access the market," said Kathryn
Jaggard, head of derivatives at NZX. "Over the next 30 years,
demand (for dairy products) will continue to outstrip supply."
Global trade in dairy futures in the U.S. and elsewhere is
relatively small. The Chicago Mercantile Exchange launched an
international skim milk contract in May 2010 that was later
delisted after trading only one contract, according to Ms.
Jaggard.
But in this small island nation--home to more cows than
people--dairy is big business.
Nicknamed the Saudi Arabia of milk because it accounts for a
third of global exports, New Zealand has benefited from a 48% rise
in dairy prices over the past 12 months. The price gains have
pushed the country's terms-of-trade to a 40-year high.
New Zealand's milk powder exports to China hit a record 4
billion New Zealand dollars (US$3.23 billion) in 2013, according to
Statistics New Zealand.
At the time of its launch in October 2010, the NZX Dairy Futures
Exchange was the world's first cash-settled market for dairy
futures, meaning no milk products changed hands. Most other
markets, such as the Chicago Mercantile Exchange, trade in physical
products.
Much of the demand for dairy derivatives traded on the NZX comes
from overseas, according to Ms. Jaggard. Last August, the exchange
changed its trading hours to overlap with the U.S. and European
trading days. Nearly 37,000 milk lots were traded in 2013, up from
210 in 2010, with around 45% of trade occurring during offshore
trading hours, she said.
New Zealand's reliance on the dairy industry has its downside,
making it especially vulnerable to industry setbacks as well as
shifts in global investor sentiment.
In August, the New Zealand dollar shed nearly 2% of its value
when Fonterra Co-Operative Group Ltd., the world's biggest dairy
exporter, said some of its products might have contained harmful
bacteria . The discovery led to product recalls in China, New
Zealand and elsewhere.
Units in the Fonterra Shareholders Fund tumbled in December
after Fonterra missed market expectations with its earnings
guidance for fiscal 2014. The fund was launched in 2012, giving
outside investors access to the farmer-owned cooperative for the
first time. They last traded Monday at NZ$6.25, against a 12-month
high of NZ$8.09.
Write to Rebecca Howard at rebecca.howard@wsj.com
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