Starting in early 2001, milk futures became available for trading on the Chicago Mercantile Exchange. Because this product is relatively new and the market is not well understood, many investors have shied away from trading this commodity. To assist those wanting to learn a little bit more about this market, today’s article will go through the basics of the milk industry.
The majority of milk produced in the world today is a product of dairy cattle. This is especially true in the United States, which is the world’s second largest producer. India, which is currently the largest producer on the planet, derives nearly half of its milk from the mammary glands of water buffalo. These two nations produce nearly half the world’s milk every year, with Russia coming in a distant third.
While the supply of milk has continued to increase due to higher yields coming from dairy cattle in particular, the per capita demand has seen a continuous decline throughout the last 3 decades. The average American today consumes about 200 lbs of milk every year, a 25% decrease from 1970. In that same time frame, milk output from cows has doubled from 9,000 lbs per year to over 18,000 lbs.
Milk is traded in three separate entities. The most liquid of these contracts is known as Class III milk, essentially the type of product that is suitable for making cheese. Class IV contracts are used for the production of butter and dehydrated items. These futures contracts are sometimes called by their slang terms – Cheese and Butter futures, respectively. Finally, the last entity is the dry non fat milk contract, which is very thinly traded and not recommended for investors. Each of these contracts calls for the delivery of 200,000 lbs of milk, and the price is quoted as a function of dollars for every 100 lbs.
A year ago, because of increased market liquidity and general speculation, the price of class III futures had spiked to over $20/100 lbs, a record high. Many ice cream shops that hadn’t seen their costs change in years were forced to raise their prices just to cover the increased milk expenditures. Since then, however, milk futures have lost nearly half their value, and today class III cheese futures are trading at just over $11, a fairly average level on a historical basis.
While milk’s limited trading history makes it difficult to predict what the future will hold, it will most likely mirror the cattle market. Based off this possibility, The Commodity Investor is predicting more short term consolidation before milk resumes its longer term bull market.
by The Commodity Investor