Dairy Market Update: March 2006

Farm milk and wholesale dairy product prices may be lower than last year, but the dairy industry is making use of dairy futures markets more than ever.

At the Chicago Mercantile Exchange (CME), the spot, or cash, market price for Grade AA butter fell to $1.15 per pound for the week ending March 24, the lowest trading price since September 8, 2003. This is still 10 cents per pound above the price at which the U.S. Department of Agriculture (USDA) purchases butter under the Dairy Price Support Program.

After trading less than one cent below the USDA purchase price in mid-March, cheddar cheese at the CME rebounded to more than 5 cents above that level, trading at $1.1850 per pound for cheddar cheese in 40-lb. blocks on March 24.

As reported previously here in News Update, farm milk production has been surging in the United States in response to the highest ever two-year average farm milk prices in 2004-2005. This in turn means that inventories of dairy products are growing. USDA reported commercial butter inventories at the end of February 2006 stood at nearly 152 million pounds, up 37% from the same month last year. Commercial stocks of all types of natural cheese were also higher than last year, up 9% to nearly 549 million pounds.

With the record-high farm milk and dairy product prices of 2004 and the fall from well above average prices in 2005 to much lower prices in the first few months of 2006, many in the dairy industry are using the dairy futures markets more than ever to help manage price risk. Trading at the CME is up substantially from the same time last year. For the week ending March 24, weekly trading volume for the Class III futures reached 4,460 contracts, up 34% over last year, and open interest in this contract stood above 32,000, up 29% from last year. The physical-delivery butter futures trading volume for the same week reached 102, with open interest of 1,009 — 13% above last year. The new, cash-settled butter contract, which has only been trading for six months saw nearly 300 contracts traded last week, and open interest reached 4,089. (See my column on the new contract, which ran in last week's News Update, by clicking here.)

Posted March 27, 2006