Milk Futures Contracts
Class III Milk futures trade at the Chicago Mercantile Exchange (CME Group), under the symbol “DA” or “DC,” traded both electronically and physically (open outcry).
A single Class III Milk futures contract is 200,000 pounds (close to 90 metric tons). The futures contracts are priced at cents per hundredweight (cwt) and the minimum price fluctuation is for $0.01 per cwt. The contracts are listed for
January (F), February (G), March (H), April (J), May (K), June (M), July (N), August (Q), September (U), October (V), November (X), and December (Z) with settlement conducted through delivery of Class III grade Milk.
How to Trade Milk Futures: Costs and Different Brokers
You can trade futures by opening a trading account with a trusted broker who handles futures trading. CME Globex, CME Clear Port, AmeriTrade and Etrade are some well known online platforms for trading futures.
Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost.
Erratic or sudden swings in the Class III Milk futures markets can sometimes cause losses to traders. However, this can be avoided if traders implement a carefully researched strategy that hedges the risks commonly associated with milk futures.
Milk futures are often affected by the following risks:
1. Falling consumer demand in the U.S.: According to the USDA, per capita milk consumption has declined in the U.S. to reach 0.61 cup per day from 0.96 cup per day. This falling consumer demand may create excess supply, which will lead to a drop in the prices of milk.
2. Cow Milk Alternatives: With changing health trends, fluid cow milk has fallen by the way side. Instead silk soy milk, almond milk and other plant-based beverages are growing in demand. If new brands selling cow milk alternatives catch on, then milk prices will take a hit.
3. Demand from China: By far one of the largest causes of price volatility in the Class III milk futures market has been the explosive demand for milk from China. Prices are expected to remain high for raw milk throughout the year, primarily due to Chinese consumption. China is the largest importer of milk from the rest of the world, and its domestic demand moves international prices quite strongly.
4. Changing weather: Global milk production fell in 2013 among the top 5 producers of milk, due to severe drought in New Zealand and cold in EU, which negatively affected milk production and caused milk prices to zoom. Since the majority of the world’s milk supply comes from around 10 countries, there is a chance that a change in the weather patterns in one of the countries will drastically impact the price of milk worldwide.
It’s also important to consider weather from another angle. The optimum temperature for the Holstein cow is about 10 °C. With increased global warming, many dairy farmers in the U.S. may see their cows’ yield decrease.
5. Inventories of Cheese and Butter: Higher cheese and butter inventories exert a downward pressure on the prices of Class III milk (which is used primarily to make cheese and butter).
6. Dairy Cows: Cows must have balanced diets, with plenty of energy, protein, fiber and water. For dairy farmers suffering from the global economic slowdown, there may not be enough resources to provide adequate nutrition to their cows, which may cause them to yield less milk. Additionally, dairy cows are susceptible to various diseases. The most common of them, Mastitis, slashes milk yield for a long duration.
Furthermore, dairy cows may not give milk for almost two months before the next calving. Milk production can suffer when the dry period extends in duration. Long dry periods can reduce the average annual and lifetime production of the cow. While pregnant cows generally reduce milk yield, the amount of milk produced increases as the cow lactates. In case of cows that give birth frequently, there can be around a 30% increase in milk production.
General conditions of large dairy farms can also affect milk yield. If cows are kept in dirty, cramped quarters, the yield may decline. Another important factor is genetics and breed. Holsteins are the best producers of milk, followed by Brown Swiss and Ayrshire, Jersey. Many dairy owners are resorting to growth hormones (BST) to boost milk production, which could cause milk supply to dramatically increase globally.
7. Leverage: There are also the risks typical to financial trading. Milk futures will have a lot of leverage, which allows traders to control a large amount of commodities for a small amount of investment. However, it also means that even a small, unfavorable change in the prices of milk can dramatically impact a traders’ entire equity.
Milk is a volatile asset, with significant risks stemming from the underlying physical market. However, milk futures have surprisingly outperformed traditional favourites like Precious Metals and Oil in recent years, and prudent traders stand much to gain from trading in milk.