Who Invests and Trades Milk Futures?
Milk futures are not too popular—but their profile has risen in the last few years, and if consumption trends are any indicator, they will likely grow in popularity from here on. With explosive demand from Asian countries in recent years, milk exports have created record income for American dairy farmers. The price of milk has fluctuated significantly as a result of this growing demand for milk in Asia, which is why milk futures have gained importance in the markets. Besides, Milk is a good asset to reflect the overall agricultural industry. This is what makes it a great time to increase exposure to this growing industry.
Several futures exist for Class III and Class IV milk, along with futures for international skimmed milk powder and non-fat dry milk futures. The most popular futures are Class III Milk futures and they are traded by two types of people: market participants and speculators.
Milk futures offer market participants a way to hedge their risk and regain control over their milk investments. Farmers, cooperatives and marketers of milk can minimize the risk of price fluctuations in the milk market by using a short hedge— which locks in a fixed selling price for the milk they produce. Thus futures allow them to get the specified amount in the contract, even if prices fall in the future. Consumers of milk, like cheese manufacturers and retailers, can use a long hedge to set a fixed purchase price for a specified quantity of milk as per their need.
Milk futures are also traded by speculators. Speculators have no vested interest in the underlying asset, that is, they will neither deliver milk nor take delivery for milk. They trade in and out of milk futures only based on speculations about the price fluctuations of milk over the trading period. They take on the price risk that hedgers are trying to avoid, because they hope to profit from the price movements. Milk speculators buy milk futures if they believe that the price of milk will go up, and sell milk futures if they believe that the price of milk will go down.