Should milk be a factor in a New Zealand asset pricing model?
Degree GrantorUniversity of Canterbury
Degree NameMaster of Commerce
In New Zealand, Milk plays a significant role in determining the economic progress of the country. Since its incorporation in 2001 Fonterra has been the leading dairy company. It currently accounts for 95% exports of milk produced in New Zealand. Fonterra is a cooperative, and its stock can only be held by and traded among its farmer members. For this reason, the fluctuation in milk prices has a strong direct impact on farmers’ incomes, but just an indirect impact on the incomes of outside (non-farmer) investors. The Fonterra Shareholder Market is a private market and is not included in the NZX50. The aim of this project is to explore whether milk price is an additional factor that investors are exposed to in additional to other market risks that are measured by the NZX50. An augmented market model is used to explore the sensitivity between company return, the NZX50, and milk prices. A cointegration test is also conducted to examine the relationship between market return and milk return. The project finds some evidence that there was a milk price effect in the period before 2013 when the Fonterra Shareholders’ Fund was created. The Fonterra Shareholders’ Fund provides exposure to milk price risk on the NZX. The effect is a small adjustment to the usual CAPM beta. There is no evidence of the effect after 2013.