NZX dairy futures trade in record volumes on fear big wet will dent milk production

Persistent heavy rain in New Zealand, the world's largest exporter of dairy products, spurred record trading in NZX dairy futures yesterday as traders bet soggy pastures heading into winter will dent future milk production.

A total of 4,680 futures contracts for whole milk powder, skim milk powder, anhydrous milk fat and butter were traded through the NZX yesterday, up from the previous daily record of 4,244 lots traded on Sept. 8 last year, NZX said. Prices for whole milk powder futures contracts for May through October gained, while futures contacts for skim milk powder and butter were mixed, with some months gaining and others unchanged.

Heavy rain has caused disruption across the country the past week, particularly in the Bay of Plenty region where a state of emergency has been declared as a low-pressure system and the tail end of Cyclone Cook signal more downpours ahead. That's caught the attention of traders, who have stepped up their activity at the tail end of the New Zealand milk production season on concern the extreme weather conditions could dent production next season and push up prices.

"It was a big day," said OMF financial markets director Nigel Brunel. "The market is on fire in spite of all the rain and because of all the rain really. All this global news of New Zealand being underwater is putting a little bit of fear into the market."

OMF's Brunel noted that New Zealand was at a low point in its production cycle, with very little milk being collected at the moment. Small volumes of milk would start being produced for next season around July ahead of the peak production period from September through December, he said.

Despite the uncertainty of whether the current weather would impact next season, traders were trying to lessen their risk, he said. "It's a risk and that's what drives markets. It's not a reality, it's a fear and perception."

"If we had very bad wet weather for a long period of time coupled with cold, that could potentially impact grass growth and the quality of pastures underfoot," he said. "It has been a wet period and if it now continues through April, May, June when they are trying to sow grass and then pastures get trampled underfoot and then it's cold and has an impact on calving and all that kind of stuff, then that could flow through to a poor start to the year."

Still, if the country had some dry weather over the next couple of months, farmers could be in a good position, he said.

The gains in the futures market signals prices will increase at the next GlobalDairyTrade auction on Tuesday.

"The futures is telling us that GDT should have a decent rally next week," Brunel said.

(BusinessDesk)