COMMODITIES | FEBRUARY
Milk Contracts? Indeed!
Activity Climbs as Farmers, Food Firms Hedge Price Swings
milk market is becoming more liquid.
a backwater of the commodities market, milk futures
and options activity has soared. The number of outstanding
contracts on the Chicago Mercantile Exchange averaged
110,197 in January, up 32% from a year ago, even as
the aggregate number of trading positions among other
raw materials fell, according to exchange data. Since
2007, it has more than doubled.
into the market are farmers and food companies
burned by the collapse in milk prices in 2009.
They are looking to protect themselves after a
recent drop in prices, following a surge last
year. Their increasing numbers make it easier
to buy and sell futures contracts, known as liquidity,
typically a problem in smaller markets. And that
is starting to arouse the interest of speculative
all of the major restaurants, food companies and
dairy processors are using the market, said Peter
Turk, owner of Rice Dairy, a brokerage that counts
many Fortune 500 companies among its clients.
"If they're not doing it themselves, I guarantee
their supplier is in one fashion or another,"
for Class III milk, which is identical to milk
used for drinking but is designated for use in
dairy products such as cheese, outperformed all
of the commodities on the S&P GSCI Index in
2011, rising 30%. Since the beginning of the year,
futures prices, which roughly track retail prices
in supermarkets, are down 7.8% and on Friday fell
three cents, to $16.07 a hundred pounds. Much
of the growth has come in options, where traders
say liquidity is improving.
Milk prices have been fueled by many
of the same trends that have sparked a boom in grain
demand and meat production: expanding middle classes
in developing nations, particularly China, that are
seeking better diets higher in protein. Milk exports
have soared, with 2011 exports totaling $4.82 billion,
up 30% from the year before.
Still, commodities traders said milk
futures remain a niche market, despite its ubiquity
in America's refrigerators. Outstanding contracts in
New York Mercantile Exchange crude-oil futures totaled
1.48 million as of Thursday; for corn futures, contracts
stood at 1.3 million at the Chicago Board of Trade as
The increase in trading
volumes hasn't kept up with the rise in the number
of outstanding contracts. Companies that use futures
and options contracts to hedge tend to trade less
than short-term, speculative investors such as
hedge funds. While the milk market has expanded,
big speculators for now are staying on the sidelines
because any large trade would move prices, said
Shawn Hackett, a Florida investment manager whose
clients are split evenly between investors and
companies who hedge commodity-price risk. "Right
now it's a cottage industry," he said.
futures were launched in 1996. Then, it was a
handful of traders clustered around a dry-erase
board. Now, they are jammed in a trading pit,
with about 50 traders crowding in during peak
periods, just off the main floor of the CME. Milk
futures and options also are traded electronically
as are other commodities. The Rogers International
Commodity Index last month included for the first
time Class III milk among its 38 commodities.
size of the U.S. dairy industry, at about $100
billion, makes it prime for growth. Many in the
dairy industry, known for its boom-and-boost cycles,
are turning to futures and options for the first
Gallagher, head of risk management for Dairy Farmers
of America, the country's largest farm cooperative
for milk by membership, viewed dairy futures as
a hobby when they started. Now, about 1,000 of
the cooperative's more than 10,000 members are
signed up for the risk-management program, double
that of a couple of years ago, and he has a staff
of eight, which also has doubled in the past couple
need more people on the phones to take calls from members
who want to place forward contracts," he said.