Asia Pizza Demand Boosts U.S. Cheese Exports, Kraft’s Costs
“For many, 2009 was hardly a year that people expected or knew how to analyze in terms of historical perspective. At the tail end of 2008, with commodity prices throughout the world plummeting, dairy prices came tumbling down too. We entered December 2008 with block cheese prices in the $1.80s and by Jan. 7, 2009, blocks were trading at $1.04, representing a 42 percent decrease in market value in just a 30-day period. Chicago Mercantile Exchange butter made it as low as $1.09, and the nonfat dry milk price spent several months at $0.80. International prices, operating without government support levels, were reported in at prices much lower than the United States.”
Case in Point: Historical Example of Dairy Price Hedging with Put Options
Dairy farmers are frequently skeptical about using futures or options to protect their milk price. The concern is that the person on the other side of the trade knows more about the market, so the dairyman’s trade will always result in a loss of money to the dairyman.
In order to debunk this myth, below is a real example of a trade strategy utilizing put options and returned an average $0.20 per cwt. to the dairy producer over 40 consecutive months.
Cheese futures: 14 months in … looking good
Before CME launched cheese futures and options on June 20, 2010, there was a healthy debate: Would this grow the dairy complex or would it “cannibalize” liquidity away from the flagship Class III contract? The verdict is in: Growth is prevailing.
I don’t know that I would look at cheese volume and open interest numbers by themselves and decide it is time to bust out the champagne, but when you look at them along side Class III and Whey it is time to celebrate … at least a little!