Why Dairy Futures?

• Change in federal dairy policy:
  • From 1950 to 1981, dairy price support based on parity  
  • This provided price stability and a market outlet
• Since 1981, dairy price support levels determined by Congress
• Dairy policy is market oriented. This results in
  • increase market risk
  • increased price risk

Why folks say we don’t need dairy futures and options.

- we market milk every day and get paid once or twice a month. One comes out okay because of averaging.

Purpose of Futures 

• Hedging: Reducing the risk of a price change
• Price discovery
• Price dissemination

How are prices determined?

• Supply
• Demand
• Political factors
• Psychological factors

What is the purpose of futures markets?

• Reduce the risk of price change-- Increase the level of price certainty
• Hedging: Simultaneous but opposite transactions on the cash and futures markets
• Hedging theory:
  • Cash Market Losses (Gains) = Futures Markets Gains (Losses)

Why some folks are using dairy futures--

• The opportunity to lock in a price is worth more than the opportunity to make more if the price goes up. That is, reaching a price (profit) objective is more important.

• The price for cheese and milk will go up and down, but if one is hedged or has a cash forward contract, price will be known.