In 2010, fanned by the fire of multiple analysts’ reports predicting continued and increased volatility, and the roller coaster market ride of the last two years, the number of markets and financial tools for managing risk in dairy products has rapidly expanded. (Eurex in Frankfurt launched its futures markets in butter and SMP in May. The NZX in New Zealand will launch a WMP futures market from October. CME also launched alternative tools earlier in the year.)
Is anybody using these markets? It appears not!
So, given the recent experience and the predictions for the future, the likely impact of, for example …
… why do companies ‘take the risk with dairy’?
Talking to companies at last week’s European Dairy Association World Dairy Forum, a number of answers seemed to emerge:
So, will the futures markets die off through neglect? My guess is probably not. The establishment of the new markets will make the facilities more available to companies around the globe, and liquidity in these markets will increase over time.
All signs point to a continued trend towards deregulating markets, albeit with the political will to protect producers in the process and the long-term consolidated supply base, making supply much more responsive to market situations. All this points to a need for commercial players to become more experienced at managing commercial risk, which occurs in many other free markets.
In their 2009 report Price Volatility in the EU Dairy Industry: Causes,Consequences and Coping Mechanisms prepared for the EDA, Dr Michael Keane and Dr Declan O Connor PhD concluded:
As the EU dairy sector is now emerging into a more free market situation, it’s likely with appropriate support that a successful futures market can evolve for dairying also. This would be of considerable benefit to industry participants in facilitating enhanced risk management at a time of increased price volatility. However a successful futures market for dairy commodities is likely to require considerable nurturing and support in its initial stages, both from institutional authorities and from the industry itself.
I’m going to play my own small part in the nurturing process by chairing a seminar on ‘Risk Management for European dairy pricing – benefits and challenges’, which will be held on the 12 October at the Renaissance Hotel in Amsterdam.
For more information on this, and other events being hosted by Zenith International, click here.
Kevin Bellamy directs Zenith International’s wide-ranging activities in the dairy industry. You can contact him here.
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