6 May 2019

Utilising derivative tools to enhance your business, andNew Zealand Production Outlook

Nick Morris, Head of Derivatives, NZX

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DisclaimerThe information provided in this document is a guide only and intended for general information purposes. It shall not constitute investment advice. In particular it does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any transaction.While reasonable care has been taken in the preparation of this document to provide details that are accurate and not misleading NZX Limited ("NZX"), its subsidiaries, directors, officers, employees, contractors and agents (a) do not make any representations or warranties regarding the use, accuracy, correctness, quality, reliability, completeness or timeliness of such information, and (b) shall not be responsible or liable for any use of any information contained herein under any circumstances. All descriptions, examples and calculations contained in this document are for illustrative purposes only.To the maximum extent permitted by law, NZX and its subsidiaries, directors, officers, employees, contractors and agents shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from anyone acting or refraining to act on this information. NZX and its subsidiaries offer services to market participants and to participants in its clearing and settlement system. Those who desire to trade any products available on any NZX market or to offer and sell any such products to others or to become a participant in the clearing and settlement system, should consider the requirements of the applicable Rules and other legal and regulatory requirements relevant to them, as well as the associated risks, before doing so.All intellectual property, proprietary and other rights and interests in this document are owned by NZX and its subsidiaries including, without limitation, all patent, registered design, copyright, trademark and service mark rights. No part of this document may be redistributed or reproduced in any form or by any means or used to make any derivative work without the written consent of NZX.NZX Derivatives Market is a licensed market operated by NZX, a licensed market operator regulated under the Financial Markets Conduct Act 2013.©NZX Limited 2019

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1. Introduction to NZX dairy derivative markets

2. Overview of dairy market volatility

3. Hedging as a concept

4. How are derivatives and other hedging tools used?

5. Considerations for implementing price risk management

6. Update on New Zealand production

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Agenda

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NZX global dairy derivativesProduct overview

Contract description Contract size

Contract length Currency

Whole Milk Powder Futures (WMP) – cash settled to average winning price WMP Fonterra Regular CP2 in the two GDT auctions for the relevant month

1 tonne Monthly (18 months listed)

USD

Whole Milk Powder Options – physically settled with one options contract equating to one WMP Futures contract

Skim Milk Powder Futures (SMP) – cash settled to average winning price SMP Fonterra Medium Heat CP2 in the two GDT auctions for the relevant month Skim Milk Powder Options – physically settled with one options contract equating to one SMP Futures contract

Anhydrous Milk Fat Futures (AMF) – cash settled to average winning price AMF Fonterra Regular CP2 in the two GDT auctions for the relevant month Butter Futures (AMF) – cash settled to average winning prices for unsalted 25kg - NZ, CP2 in the two GDT auctions for the relevant month Milk Price Futures (MKPF) – contract size of 6,000kg/ms, cash settled to the Fonterra Farmgate Milk Price annually

6,000 kg milk solids

Annual NZD Milk Price Options (MKPO) - physically settled with one options contract equating to one MKP Futures contract

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NZX global dairy derivativesMarket overview

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

USD

/MT

WMP front month price and NZX dairy derivatives monthly volumes since launch

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Ope

n in

tere

st (n

umbe

r of c

ontra

cts)

Open interest across all NZX dairy derivative contracts

Commodity FuturesCommodity OptionsMilk

Our dairy journey 2018/2019: records on records

Source: NZX Data & Insights. Note, dairy derivatives customers globally, not exhaustive

+36%CAGR in active

traders since 2011

+54% volume CAGR since

2011

Millionth lot traded, May

2018

106,199 lotsrecord quarterly

volume, Q3 2018

45,923 lotsrecord volume month, March

2019

+57% growth in lots traded in Q1

2019

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A truly global marketplace

Source: NZX Data & Insights. Note percentage of trading accounts located in each region based off 2018 whole milk powder, skim milk powder, anhydrous milk fat, butter known underlying customer numbers, not exhaustive

• NZX dairy derivatives

are being traded in

over 50 locations

globally

• On average 31% of

volumes are from Asia

– 21% from China

16%

2%

9%

11%

17%

32%

13%

Location of our customers

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NZX global dairy derivativesOnward and upward to global benchmark status

0%

2%

4%

6%

8%

10%

12%

14%

16%

1 2 3 4 5 6 7 8

Perc

enta

ge o

f und

erly

ing

trade

d

Years since launch

NZX dairy derivatives vs LIFFE Milling Wheat volume comparison

NZX Milling Wheat

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Overview of dairy market volatility Significantly more volatile than other ‘risky’ assets

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

% p

rice

chan

ge

NZD price percentage change

4 week % change

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Overview of dairy market volatility Significantly more volatile than other ‘risky’ assets

-45%

-35%

-25%

-15%

-5%

5%

15%

25%

35%

45%

2010

2011

2012

2013

2014

2015

2016

2017

2018

NZX WMP price percentage change

4 week % change

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Overview of dairy market volatility

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1991

1993

1995

1997

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

WM

P Pr

ice

(USD

/MT)

WMP Price

1990-2005Volatility: +/- ~9%

2006-2019Volatility: +/- ~28%

Globalisation and emerging market demand for protein drive new era of heightened volatility

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Overview of dairy market volatility Price risk management tools around the globe

UnitedStates

Europe New Zealand

Futures & Options ✓ ✓ ✓

Processor Agreements

✓ ✓ ✓

Bank Swaps ✓ ✓ ✓

Margin guarantee programs, subsidies, tariff protection

✓ ✓ ✗

Hedging is about

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Hedging as a concept Why hedge?

Reliable budgeting/forecasting

Being counter cyclical

Reducing risk

Ability to make strategicdecisions

ProfitstabilityCertainty

Cash flow management

However: Doing nothing is still doing something…14

Hedging as a concept Risks of hedging with futures

1. Cash flow implications – cash collateral required

2. Basis risk

3. Calendar risk

Time

Price

Futures price

Spot price

Basis risk

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Hedging as a concept Liquid financial markets are crucial to the dairy industry

Flexible price risk

management tools

Price discovery

Reduced credit

exposure

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How are derivatives and other hedging tools used?Commodity price volatility

Finished commodities (WMP, SMP, AMF, BTR)

• Selling futures to fix price• Using options to hedge against

larger moves• Selling options to add additional

premium to GDT sales prices

Farmgate Milk Price

• Buying milk price futures to lock in a portion of cost line

Using both finished Commodities and Milk Price hedging together • Lock in gross margin• Aim to deliver sustainably higher margins• Taking advantage of market pricing differentials when opportunity

presents itself

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How are derivatives and other hedging tools used?Competitors customer/supplier contract terms

Offering customer and farmer price risk management (PRM) solutions to attract business

Customer• Fixed price contracts• Collars• Structured products

Clear risk via the exchange or vs contracts to farmers

Farmer• Seasonal fixed price contracts• Price floors

Clear risk via the exchange or vs contracts to customers

Advantages• Add preferential terms to

customers in a competitive market• Provide price certainty for own

business

Costs• Administrative/operational cost of

managing/laying off risk

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Considerations for implementing price risk managementSteps to implementing a risk management function

Quantify risks/identify opportunities

Define risk appetite

Set parameters

Implement Governance framework

Review/monitor performance

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Considerations for implementing price risk managementTrading activity should be strictly governed and reported on

Back OfficeTreasury & Operations

Settlement

Board of DirectorsApprove Strategy and business plan, Approve policy & delegated authorities

Middle OfficeAccounting, Treasury &

Capital MarketsValuation and reporting

Front OfficeTrading team

Take commodity positions

Financial Risk & Portfolio Management CommitteesManagement oversight of price risk management and commodity derivative activity. Compliance and controls

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Update on New Zealand productionProduction journey 2000 – 2018

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

Total Cows Milksolids production million kg

kgMS Millions

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Update on New Zealand productionSnapshot 2019 season

Mild Production kgMS June 2018 – March 2019

1,658,992,000 3.5% head of YTD for 2017/18 season

Weather

• Mild winter • Wet Spring • Drought in high producing

regions late summer early Autumn

Sentiment

• Emission trading scheme • Environmental pressure

• Water clarity and Access • Nutrient leaching

• General public perception

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Update on New Zealand productionHeadwinds

Climate Change, Environmental, Human,

Animal Health

Land use regulation

Emergence of alternative animal milk

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Update on New Zealand productionOpportunities looking forward

Pay forecast $7.50 2019/20 season Capped Production

Consumer focused Production

• Strong financial performers are emerging within the producers space laggards not tolerated

• Processors increasing focus on value play

• Limitations are driving innovation and science to look for solutions to produce more with less

• Focus on engaging digital technology and data to allow or precision decisions as resources are limited

• Producers engaging more with community and consumers domestic and internationally

• Diversification of farming businesses to provide multiple income streams

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The Team

Save the date NZX Global Dairy Seminar

Be part of the dairy industry’s leading Asia-Pacific risk management conference. Save the date for our annual Singapore seminar in October.

When: Tuesday 22 – Wednesday 23 October 2018Where: Singapore

The theme of this year’s seminar is ‘A Sustainable Outlook’ examining the economic and environmental factors influencing the evolution of our global market in New Zealand alongside other key dairy producing and trading regions.

Ticket sales and agenda will be released in May.

To express an interest in becoming an event sponsor, please contact Head of Derivatives Nick Morris at: nick.morris@nzx.com

For all other queries please contact the NZX derivatives team on +64 (9) 309 3672 or at: dairyfutures@nzx.com

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Thank you!

Contact Nick MorrisHead of DerivativesDDI: +64 9 308 3703Mobile: +64 21 33 7781Email: nick.morris@nzx.com

NZX Derivatives DDI: +64 (9) 309 3672 Email: dairyfutures@nzx.com