Monthly Archives: December 2012

Patrick Lunemann, the president of the Minnesota Milk Producers Association, and I were guests at the Daily Circuit on Minnesota Public Radio this morning, talking about what would happen to milk prices after January 1, when current farm bill legislation expires and Agricultural Act of 1949 once again becomes the law of the land.

The issue arises from the fact that the Secretary of Agriculture would be forced to set farm-level milk support prices at the minimum of $39.08, and retail fluid milk prices could increase from $3.30 to $5.00. As Pat and I explained, this is likely just a storm in a glass of milk – a useful way to prod the House of Representatives to get going with the Farm Bill through widespread public outrage. No dairy farmer desires such harmful disruptions of dairy markets, especially at the time when U.S. is becoming an important global player, and our dairy exports consume milk production equivalent to one full day per week. And more importantly, nothing is likely to happen next week, or even for several months.

You can listen to our segment here.

I’ve also written a blog on this topic for the UMN Food Industry Center’s blog Food Thought.


P.S. Jim Dickrell reports that that speculators seem to be on the move, buying very cheap deep-out-of-money call options!

In analyzing futures markets performance, it is often necessary to go back and examine how did a particular contract trade over some extended period of time. Quants (quantitative analysts) at companies that offer risk management services to dairy sector know this better than anyone else. And my latest paper is really seeking to help them do their work better. So I do apologize if the rest of this blog entry will seem excessively technical or wonkish to some of my readers.

The question is – can we get implied cheese futures for time before July 2010, when cheese futures first started trading. For period from April 2007 onward that is really a trivial task – one can simply use Class III milk futures, butter futures and dry whey futures, and work backwards from the rules for constructing announced Class III milk prices.

What about period before 2007, when dry whey futures did not trade? What we propose in this paper is that dry whey futures be estimated based on historical relationship between announced dry whey prices, announced Class III and Class IV milk prices, and lagged dry whey prices. Once we have “fitted” dry whey futures, we can proceed in the similar fashion as for period after 2007.

There is another problem. Cash-settled butter contract did not start trading until October 2005. We use deliverable butter contract instead of cash-settled butter contract for the earlier period. The challenge with using deliverable butter contract is that it did not trade for all calendar months. For contract months for which deliverable butter did not trade, we use first next nearby butter. For example, for April we use May, for both January and February we used March, etc.

What you get when you do all that is a set of csv files with ‘synthetic cheese futures’. Based on our extensive research, these are pretty good approximations of what cheese futures would have traded at, if they did exist before 2010. One period where probably more caution is needed is fall of 2006, when dry whey started rising rapidly.

The provided files always use best available approximation method:

    • For trades prior to October 2005, synthetics are inferred using deliverable butter contract, Class III milk contract and fitted dry whey futures (a function of Class III, Class IV and lagged dry whey futures – or lagged announced dry whey futures, for the first nearby contract).
    • For trades between October 2005 and until April 2007, we used cash-settled butter contract, and the rest is the same as in the previous method.
    • For trades after April 2007, we used Class III, butter and dry whey futures, exactly like you are probably using right now to get at ‘implied cheese futures’.

The data can be downloaded here. Working paper explaining the method is here.

This work will soon be published in the Journal of Agribusiness, and if you are planning to use these data I suggest you obtain the published version of the article. The full reference is:

Bozic, M. and T.R. Fortenbery. 2012. “Creating Synthetic Cheese Futures: A Method for Matching Cash and Futures Prices in Dairy.” Journal of Agribusiness, forthcoming.