market derivatives in the eu dairy sector...2013/06/18 · market derivatives in the eu dairy...

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


Cheese

Whey powder


Butter

Skimmed

Milk Powder






• 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






• 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


• 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


• 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






• 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



price volatility

– EU Farm gate milk price and commodity prices have limited correlation.


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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



price volatility

– Farm gate milk price and commodity prices have limited correlation

– Global market, EU market and US market are not (yet) perfectly aligned


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price volatility

– EU Farm gate milk price and commodity prices have limited correlation


– Settlement mechanism for cash settled contracts is not yet fully trusted



price volatility

– EU Farm gate milk price and commodity prices have limited correlation



– The majority of dairy products do not behave like commodities



price volatility

– Farm gate milk price and commodity prices have limited correlation



– 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

market derivatives in the eu dairy sector...2013/06/18 · market derivatives in the eu dairy...

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