Using Index-Based Trading Platforms in Dairy Commodity Markets
By Ronald K. O'Brien II, President of Nui Markets North America
Several widely traded indices in the dairy market allow for purchases and sales on variable terms, providing flexibility and risk management opportunities. Nui Markets offers a unique platform for physical index-based trading, providing traders with numerous advantages over other digital, one-dimensional, fixed-price commodity trading platforms.
Independence of pricing and timing for physical procurement:
Due to federal order minimum pricing, a supermajority of the milk purchases by cooperatives is done through NDPSR index allocations. However, the selling of the finished product is done by a mixed bag of NDPSR/CME allocations and spot trades. This caveat opens the cooperative up to significant basis risk and price risk.
For buyers, spot trades solve the challenge of covering specific input purchases, but they open themselves to the risk of being able to buy that specific product at published market prices due to basis risk. By purchasing products settled weekly or monthly to an index, buyers can secure their exact specifications at published market prices. This can even include delivery costs, which eliminates concerns about fluctuating transportation markets. Index-based trading also allows sellers to focus on efficiency and generating value above input costs.
Here's an example. An end user in Mexico could purchase NFDM from the U.S. settled monthly to the NDPSR Index, with the purchase price that includes delivery to the border. Fixed, pre-approved delivery costs offer the buyer three guarantees: a pre-approved quality supply, priced at market price and free from the stress of transportation price fluctuations.
Greater freedom to manage risk:
Coops and most processors judge their sales team by how their yearly sales revenue performs against the index they purchase inputs from. Their focus is not on assuming price risk but on efficiency, creating as much value above the input cost as possible. With known index prices, both buyers and sellers can manage price risk internally on financial exchanges or through broker-dealers and simply focus on securing their physical products/sales. The security of allocation sales in a falling market never goes unnoticed when competitors are fire-selling products. The same goes for buyers when they are scrambling for tight-spec products during a short squeeze.
Reliable Data and Trustworthy Index:
Index trading relies on accurate and regular data to inform buying decisions and manage risk effectively. The three most widely traded indices in the U.S. dairy trade are as follows:
NDPSR, published by the USDA one time per week.
CME Spot Index, published daily.
AOM Weekly Average, published weekly.
The Advantages of Nui Markets:
Nui Markets offers unique functionality in the dairy commodities marketplace, providing traders with the ability to bid and offer index-priced dairy commodities over the short, medium and long term with the use of our strip order functionality. Both participants and viewers of these transactions acquire critical basis data information. Trading partners can engage based on this information in real-time.
Our most recent sell-side Enterprise is already conducting their first tender for full-year 2024 allocations for a segment of their dairy portfolio. This functionality inside of our sell-side enterprises will become a common practice for our Nui clients.
Nui Markets stands out as the only digital tech platform that enables both marketplace and enterprise customers to participate in buying and selling index-priced dairy commodities. Through the platform's transparency and reliability of data, traders can make informed decisions, manage risk efficiently, and optimize their sales and procurement strategies.
As the industry finalizes next year’s allocation contracts, why not set up a buy-side allocation tender through Nui to prove you’re achieving the best, most competitive price.
Getting set up in the system is easy, and trading using real-time data is simple. Why not get started today? The first procurement tender and first month in the marketplace is on us!