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Risk management: Cheese joins CME futures market

By Guy Montague-Jones , 07-May-2010

CME Group is launching cheese futures and options on its Globex trading platform to help processors and manufacturers protect themselves from price volatility.

Dairy prices over the past few years have been subject to considerable volatility making it hard for participants in the market to plan ahead with confidence. Futures are one market tool that is open to processors and manufacturers to help them better manage price risks.

Industry participants can already trade in futures for Class III milk and Dry Whey with CME Group. The derivatives marketplace is now adding cheese in a move that will complete its coverage of the products in the chain or ‘dairy crush’. In other words, the original commodity, Class III milk, can be hedged as well as its product and by-product.

Risk management

The new cheese contracts will enable companies to lock in future prices for cheese. Price will reflect the market expectation of the value of cheese at a forward date and allow both processors and food companies to reduce risk from price shocks.

Based on US domestic cheddar cheese, these new contracts will be cash-settled, traded electronically on CME Globex, and block trade eligible.

Mary Haffenberg, associate director, commodities, told DairyReporter.com that

CME Group had decided to launch cheese futures because of increased global demand for cheese. Similarly CME Group had decided to begin trading in dry whey futures in 2007 as the market for the by-product in nutritional products such as protein bars really took off.

Customer requests

Tim Andriesen, CME Group managing director of agricultural commodities said: “This contract was requested by our customers such as manufacturers and processors of cheese to better fit the needs of their risk profile.

“Many of these customers already participate in our Class III milk and Dry Whey futures and options markets.”

The size of the domestic cheddar cheese market is estimated at between $5.5 and $6.3bn according to CME Group.

The new contracts will be listed monthly with each contract representing the equivalent of 20,000 pounds of cheese and the tick size of $0.001 per pound. Trading hours are Sunday through Thursday, 5:00 p.m. to 4:00 p.m. Chicago time, and Friday until 1:55 p.m., with daily trading halts from 4:00 p.m. to 5:00 p.m.

Trading is scheduled to begin on June 20. For more information, click here.

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