NZ: Do dairy futures predict GDT auction prices? – Westpac

Imre Speizer, Research Analyst at Westpac, reviews the performance of NZX whole milk powder futures as predictors of GDT auction prices and finds performance has generally improved during the past few years, and futures are now a useful predictive tool.

Key Quotes

“NZX whole milk powder (WMP) futures started trading in October 2010. Since inception, they have appeared, at first glance, to have had a close relationship with GDT dairy auction prices.

Despite the three most recent auctions each resulting in a fall in prices, the futures curve slope is currently positive, indicating an expectation prices will rise over time (as well capturing storage costs, interest rates etc.

Futures curve slope has been positive most of the time during the past two years, a period when physical prices have been low. Indeed, the relationship between futures curve slope and physical prices has been an inverse one since inception (Chart 7), endorsing the mean reversion theory for dairy prices and at least partly explaining the positive futures prediction bias.

While a cursory inspection of futures’ predictive performance since inception reveals a mixed record, there has been a trend of improvement during the past few years such that a properly specified futures-based model can, on average, now deliver valuable insights ahead of each GDT auction.”