Are futures markets possible in the EU?
Published 25/01/2011 | 05:00
There is an increasing number of dairy industry leaders looking for the establishment of futures markets for milk in the EU.
They believe that it will help farmers deal with the extreme volatility that has emerged on European dairy markets since the dismantling of market control measures started in 2006.
It is also this volatility that draws traders and speculators into setting up a futures market.
Price fluctuations allow a speculator and a hedger (in this case a farmer) to take opposing positions. Without speculators the market will not function successfully.
However, in order for a futures market to be established, a number of other criteria are required.
In order for participants to have confidence in a futures market, they will look for a number of other participants to be involved and will also prefer to see regular activity.
With a low number of participants and/or a low volume of trading, market manipulation becomes much more of a risk.
This will prove a major obstacle to developing a futures market in Europe as uptake at the beginning of any market will be understandably slow.