market derivatives in the eu dairy sector...2013/06/18 · market derivatives in the eu dairy...
TRANSCRIPT
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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
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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?
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Milk & Dairy Products
Milk fat
Insoluble protein
Soluble protein
Milk sugar
Milk minerals
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Milk & Dairy Products
Cheese
Whey powder
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Milk & Dairy Products
Butter
Skimmed
Milk Powder
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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
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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.
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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
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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
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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
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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
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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
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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
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What is trading today Open interest
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What is trading today Open interest (futures)
• 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
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What is trading today Open interest (futures)
• 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
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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?
![Page 18: Market Derivatives in the EU Dairy Sector...2013/06/18 · Market Derivatives in the EU dairy sector •Introduction: Milk & Dairy Products •Overview of available price risk tools](https://reader035.vdocuments.mx/reader035/viewer/2022071021/5fd59978a5556123175a68b1/html5/thumbnails/18.jpg)
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
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What are the challenges for dairy futures
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What are the challenges for dairy futures
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What are the challenges for dairy futures
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What are the challenges for dairy futures
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What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– EU Farm gate milk price and commodity prices have limited correlation.
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What are the challenges for dairy futures in the EU
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EUR/100 kgMilk Prices Evolution (up to February 2013)
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
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What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
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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What are the challenges for dairy futures in the EU
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SMP market prices
Premium
European SMP(€)
Oceania SMP (€)
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What are the challenges for dairy futures in the EU
1.000
2.000
3.000
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5.000
6.000
Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
USD/t
World Market
EU
WMP Prices
© ZMB
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What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– EU Farm gate milk price and commodity prices have limited correlation
– Global market, EU market and US market are not (yet) perfectly aligned
– Settlement mechanism for cash settled contracts is not yet fully trusted
![Page 29: Market Derivatives in the EU Dairy Sector...2013/06/18 · Market Derivatives in the EU dairy sector •Introduction: Milk & Dairy Products •Overview of available price risk tools](https://reader035.vdocuments.mx/reader035/viewer/2022071021/5fd59978a5556123175a68b1/html5/thumbnails/29.jpg)
What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– EU Farm gate milk price and commodity prices have limited correlation
– Global market, EU market and US market are not (yet) perfectly aligned
– Settlement mechanism for cash settled contracts is not yet fully trusted
– The majority of dairy products do not behave like commodities
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What are the challenges for dairy futures in the EU
– The EU dairy market has long time been shielded from
price volatility
– Farm gate milk price and commodity prices have limited correlation
– Global market, EU market and US market are not (yet) perfectly aligned
– Settlement mechanism for cash settled contracts is not yet fully trusted
– The majority of dairy products do not behave like commodities
– Everybody is waiting for more liquidity to start trading
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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
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Market Derivatives in the EU Dairy Sector
Thank you!
Bart Van Belleghem
Secretary General – Eucolait