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European dairy futures could finally catch on

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'Instability' in dairy prices allow dairy futures, at last, to take off in the Europe Union, Commerzbank, said, as Euronext waits for traction in its revamped products.

The dairy industry in the EU - the world's top milk producer, and second biggest exporter - is marked by a lack of commonly-used futures contracts, meaning agreed price benchmark on which to base supply contracts

However, the increasing volatility in dairy prices, which halved last year at New Zealand-based GlobalDairyTrade auctions, may spur growing interest in hedging in the bloc, Commerzbank said.

Many observers believe that Europe's dairy industry, which has surprised many observers with its lack of appetite for dairy derivatives despite its global importance, may be spurred to adopt futures thanks to the lifting of production quotas.

The removal of restraint on output may leave the sector more vulnerable to the price-led cycle of higher and lower milk production growth evident in the world market, some commentators say.

"Price instability"

While bodies such as the OECD and European Commission have forecast gentle rises in dairy output ahead, "the smooth forecast development should not detract from the fact that we will continue to see significant deviations from the path," Commerzbank said.

"Price instability will thus remain a relevant topic," creating demand for tools to hedge forward.

"Over the next few years, the importance of the dairy futures exchanges as a hedge against elevated price risks… should thus increase."

New Euronext products

The comments come a month after European cash and derivative exchange Euronext launched revamped dairy futures, in butter, skimmed milk powder and whey powder, in units of 6 tonnes.

The derivatives - which replace a milk powder contract in which Commerzbank said "no noteworthy trading took place" - were designed to tap interest largely from key European exporting countries such as the Netherlands, Germany, Denmark and Ireland.

Nonetheless, open interest – the number of live contracts – was zero in all three products on Wednesday afternoon, according to Euronext data.

Trading in dairy products at Frankfurt-based Eurex is also "low", Commerzbank said.

US exchange sees interest gain pace

However, a poor take-up of dairy futures in Chicago-based CME "was also the case at first", the bank said.

There, "trade in dairy product contracts has gained pace in recent years", with cheese and dry milk contracts growing in popularly particularly over the past year.

On May 12 open interest in non-fat dry milk futures and derivatives on the CME exchange was 11,972, while cash-settled butter futures and derivatives had a combined open interest of 11,812.

Europe may see a similar development dynamic, Commerzbank said.

By Agrimoney.com

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