Cash-Settled Butter Futures Contract Off to High Volume Start

Six months ago, the Chicago Mercantile Exchange (CME) launched a new product to assist the dairy industry in managing price risk in the butter and butterfat markets. Part of the impetus for the launch was a meeting between representatives of CME and IICA, where IICA presented a fact-based analysis of why the new contract would be beneficial. The cash-settled butter contract began trading September 19, 2005, and the volume of trading has steadily grown.

In the past two months, dairy trading volume for cash-settled butter futures has averaged more than 100 contracts per day, and open interest at the close of trading March 16th stood at 3,980 contracts. Since the trading unit for each contract is 20,000 pounds of butter, this open interest represents nearly 80 million pounds of butter, equal to about 23 days of U.S. average butter production.

Meanwhile, the volume of trading and open interest for the CME physical delivery butter contract (which has traded at the CME for over nine years) has also increased in the past few months. While trading volume still averages far below that for the cash-settled contract (about 100 contracts per week), open interest has grown from less than 600 contracts in early December to over 1,000 last week, representing another 40 million pounds of butter (the trading unit for this CME product is 40,000 pounds of butter).

The CME cash-settled butter futures contract is designed to meet the needs of food and dairy companies that have exposure to butterfat price risk, but who do not want to take physical delivery of the product. The contract is cash-settled based on the U.S. Department of Agriculture's (USDA) reported monthly weighted average price in the United States for butter.

IDFA teamed up with the CME last fall to sponsor a series of regional workshops to inform the dairy industry and the commodity trading community about this new risk management tool. It appears the word has gotten out, and that there is strong positive response to the new tool.

The rapid volume growth may also be attributed to the fact that this contact was the CME's first dairy futures contract to trade exclusively on the CME® Globex® electronic trading platform, which provides individuals the opportunity for immediate market access and direct participation in price discovery.

Posted March 20, 2006