Nicholas Kennedy, head of business development for commodities, Euronext, told DairyReporter.com the introduction of dairy commodity futures in Europe post-quota will provide a “reference point for the price of milk.”
Euronext, a pan-European stock and derivatives exchange, is scheduled to launch three dairy commodity futures - salted lactic butter, skimmed milk powder (SMP), and sweet whey powder - on April 13.
It celebrated the planned launch of its new dairy derivatives complex in Amsterdam on the eve of the EU milk quota abolition.
Introduced as a temporary measure in 1984 to address the over-production of milk, EU milk quotas expired on March 31 2015 – the final day of the 2014/15 season.
“The big concern at the end of the quotas is volatility,” said Kennedy.
“Next time there’s big volatility there will be no safety net.”
Euronext's dairy derivatives "tool" can, however, offer some protection against such price fluctuations, he said.
“Protect your margin”
For more than 30 years, EU Member States have been issued every season with two national quotas – one for milk deliveries to processors and the other for direct sales at farm level. Member States that exceeded either quota were handed a fine called a superlevy of €27.83 per 100kg.
Euronext, like the entire European dairy sector, took steps to prepare for the end of the quotas.
It first announced plans for a full suite of post-quota dairy futures and options in November 2014.
“People across Europe were waiting for the end of the milk quotas,” Kennedy said. “We were seeing an increase in questions.”
“The starting point for everyone was that there was no reference point for the price of milk.”
“To find a solution, we looked at the most traded dairy derivatives,” he said. “We needed a milk element, a fat element, and a protein element.”
Typically, just 1% of commodity futures contracts "go to delivery," said Kennedy.
In around 99% of cases, he said, traders will "close out."
This, Kennedy said, enables commodity producers to “identify price so many months in future and protect their margin.”
“We’re not excluding anything”
In time, Euronext could add more commodities, such as cheese, to its dairy derivatives complex, Kennedy said.
“A lot of effort has gone into the specifics,” he said. “The next stage it going to be to watch and learn. It is impossible to talk about volumes or say what will be most traded.”
“Nothing is set in stone. It’s all starting, it’s all very new. We’re not excluding anything.”
A selection of dairy commodity options will also be launched by "early fall."
"Historically, we launch them together. We were keen to get the futures our as soon as the quotas ended," Kennedy added.
"Not having options for a few months won't be detrimental."