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Identifying the Purpose and Success of Dairy Futures Contracts: Are Class III and Cheese Futures Contracts Serving Distinct Markets?

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  • Tejeda, Hernan A.
  • Trujillo-Barrera, Andres
  • Fortenbery, T. Randall

Abstract

Weekly cash cheese prices are highly correlated with weekly average cheese futures prices. In addition, cash cheese prices exhibit a high degree of correlation with weekly average Class III milk futures. Lastly, cheese futures and Class III milk futures are highly correlated. Based on trading volume, the Class III milk futures market is more than five times larger than the cheese futures market, and yet both are quite thin compared to derivative markets for grains and cattle. Moreover, less than two percent of U.S. cheese production between 2009 and 2018 was traded in the cheese futures market. Given the rather small number of trades in both Class III and cheese futures, and their high level of price correlation, one wonders whether the separate dairy contracts are serving unique and distinct markets. Would it be (more) beneficial if only one of the contracts existed? If the markets are effectively redundant, the elimination of one could increase liquidity in the other, and potentially reduce overall price volatility. The objective of this paper is to investigate whether its possible market performance could be improved through the trading of a single dairy futures contract, and develop a baseline for evaluating the potential economic and financial benefits that would result.

Suggested Citation

  • Tejeda, Hernan A. & Trujillo-Barrera, Andres & Fortenbery, T. Randall, 2021. "Identifying the Purpose and Success of Dairy Futures Contracts: Are Class III and Cheese Futures Contracts Serving Distinct Markets?," 2021 Conference 316402, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nccc21:316402
    DOI: 10.22004/ag.econ.316402
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    References listed on IDEAS

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