October 29, 2017 / 11:24 PM / a year ago

NZX adds skim milk powder options contract as futures demand soars

WELLINGTON, Oct 30 (Reuters) - New Zealand’s NZX said on Monday it will introduce a new options contract for skim milk powder in December to expand investors’ options to cope with volatile prices in dairy, the country’s largest goods export.

The Global Skim Milk Powder (SMP) Option will launch on December 4, market operator NZX, said in a statement.

The firm decided to add another derivative for skim milk powder, after demand for its existing futures contracts soared 113 percent in 2017. NZX already runs options contracts for whole milk powder and liquid milk.

“The addition of a Global Skim Milk Powder Option contract will provide traders in our global market with another tool to help manage volatility in dairy commodity prices,” said Nick Morris, head of derivatives at NZX in a statement.

Milk processors and food firms that buy ingredients in bulk have had to grapple with turbulent dairy prices in the past few years.

Nigel Brunel, director of financial markets at OMF, New Zealand’s largest broker for dairy futures, said that options contracts added a less risky alternative to futures contracts and were a “welcome” addition.

“There’s good demand for skim (milk powder) and traders can trade different markets so options are a natural thing to bring on board,” Brunel said.

Global dairy prices plummeted almost 50 percent from 2014. Prices began to pick up in 2016, though the recovery has been shaky.

Skim milk powder has slipped 32 percent from the start of 2017, according to figures from auction platform Global Dairy Trade.

Options contracts allow investors to hedge against changes in pricing by providing the buyer with the right to buy or sell an asset at a future date. However, unlike futures contracts, the contract is not binding.

Reporting by Charlotte Greenfield; Editing by Stephen Coates

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