Sunday, June 21, 2009


Dairy futures are traded on the Chicago Mercantile Exchange (CME). Trading began in 1998, if I remember correctly. You might or might not, be surprised to learn volatility increased dramatically at the same time on the cash spot dairy trading on the CME. Futures are a “risk management” and without risk there is no need to participate.

With most commodity markets the futures price drives the cash price. Kellogg, for instance knows how much corn it will need, say in October, and buy futures positions based on their needs. As the time approaches Kellogg’s and many other best guesses eventually become the cash market price.

Only two commodities have a thin, few players, cash market determining futures prices – dairy and natural gas. Why does Enron come to mind?

So, in looking at the futures prices you need to understand, in the truest sense, there is no market.

Here’s a link to the GAO report on the CME cheese trading:

This is really a follow-up on a major study 1996 by University of Wisconsin. U of W had subpoena power and state funding to look at cheese trading on the “National Cheese Exchange” (NCE), which was really a room in Richard Gould’s law office in Green Bay, Wisconsin.

After the paper came out there were two Working Papers:

As a result of the 1996 study, cheese trading fled to the CME where there was even less transparency. USDA has given cover to this sham by claiming to obtain prices from the NASS survey. GAO called that a redundancy.

The Commodities Futures Trading Commission (CFTC) investigated to some extent and settled with Dairy Farmers of America (DFA) for manipulating on one occasion. That is not to say there were plenty more, that was just the result of the settlement.

There are now five legal cases against DFA which have recently been consolidated into one case.

1 comment:

  1. I grew up in the citrus business in Florida, and OJ's are a very thin market also.

    There have been several reports over the past year about the fact that the futures markets no longer offer farmers a legitimate hedging since the to hedge funds moved into the markets in a big way.

    I have friends in the Mid West who are grain dealers and they stopped hedging last year due to the run up in futures prices, that had nothing to do with the cash prices. Many farmers were blown out of their hedges when they could not make the margin calls. They lost on their grain and they futures positions. Not a very sustainable situation.

    What is your feed situation this year?