'Broader' wool futures contract makes comeback

By Hugh Stringleman

Friday 13th June 2003

Another attempt is being made to establish a wool futures contract in New Zealand, on a broader base with appeal to more woolgrowers.

Two previous wool futures contracts, one in the 1980s and another in the 1990s, were withdrawn after three years due to lack of trading.

Wool exporters and brokers were keen to participate, it was claimed, but farmers were not interested. In the first home-grown attempt, the wool description for the contract, 35F2D, was quite narrow and the unders and overs calculations reportedly confused farmers.

SFE Corporation, which owns and operates the New Zealand Futures and Options Exchange (NZFOE), has circulated a new broad wool futures proposal around the wool industry.

It is seeking responses by next Friday (June 20) and targeting the beginning of September for the listing of the new contract, in time for the main wool-selling season.

SFE's New Zealand director Greg Boland said a successful new wool futures contract would depend on the relevance of the broad contract base to farmers and having "market makers" who were prepared to make a price.

Therefore the new proposal consisted of a cash-settled contract based on a newly created SFE broad wool indicator, being an arithmetic average of specific New Zealand wool types in the 36 to 38 micron range.

The SFE also proposed to offer fee discounts to market participants who helped fund the introduction of the product. It is seeking commitments to pre-payments of fees in a range from $2000 to $25,000.

The standard exchange fee would be $10 a contract.

The new product would be useful to wool exporters, brokers and processors, not just woolgrowers.

SFE operates a fully electronic market with an open interface access by proprietary software or internet inquiry.

It expected that 20-40 wool contracts will be traded each day by the end of the first year, Mr Boland said.

SFE also has ideas of launching a prime lamb contract and something for the forestry sector. In Australia it has a cattle contract and an electricity contract.

All exporters already hedge their forward wool contracts on the forward currency exchange market operated by banks, as some growers do.

The latest annual report of SFE Corporation shows the New Zealand futures exchange traded only 630,000 contracts in 2002, a fall of 28% on the previous year.

To the end of April, the NZFOE volume was down a further 30%.

It facilitates contracts on three and 10-year government stock, 90-day bank bills and a Stock Exchange top-10 index.

Meat and Fibre Producers chairman Ian Corney of Owhango, King Country, said growers would need to understand the proposed contract, the terms of trading and identify any pitfalls before making individual decisions to participate.

"Weak selling of wool by farmers is a problem and anything which provides more options needs to be seriously considered," he said.

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