Why does the CME now offer
two Milk contracts?
The Milk (Class III) was changed from
the BFP in January 2000 to conform to
the new component pricing structure of
the dairy "reform" legislation for milk
used in the manufacturing of hard
cheeses. It has provided an excellent
risk management tool for the cheese-
milk industry.
The CME added the Class IV Contract
in July 2000 in response to industry
comments dealing with the hedging of
butterfat risks using the revised Milk
(Class III) contract. The "reform"
legislation changed the price
relationships of Class III cheese-milk
with the other classes, making the CME
Milk contract not as closely correlated
as was the old BFP.
Also, since the component formulas for
Class II Milk are similar to the Class IV,
the addition of the Class IV provides a
direct hedge for ice cream, yogurt and
other perishable manufactured
products, along with firms whose
processing accumulates butterfat
inventory.
And as an added benefit, the Class I
(fluid milk product) users will have the
option of using either the existing Milk

1995 to 2000
8.50
10.30
12.10
13.90
15.70
17.50
($/cwt.)
Hi
16.27 13.32 12.81 13.09 13.77 13.92 14.77 15.79 16.26 16.04 16.84 17.34
Lo
10.05 9.54 9.54 9.41 9.37 9.46 10.66 10.13 10.76 10.02 8.57 9.37
Avg
12.60 11.66 11.84 11.49 11.18 11.68 12.60 13.25 13.73 12.85 12.11 12.31
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Why have milk prices become so volatile?
The lowering of price supports by the government, along with increased demand,
mainly for cheese and cheese products, have brought about a price equilibrium
between the supply of milk and the uses of milk. Thus, any seasonal changes in the
production or demand for milk and milk products create volatile price swings.
Milk Production vs. Commercial Consumption
105
119
133
147
161
175
(billion lbs.)
Production
115 120 123 121 123 128 133 136 140 135 143 143 143 144 148 148 151 151 154 155 154 156 157 163 168

significance (to both hedgers and traders) is the price relationship of the major milk
component of cheese (protein) which constitutes Class III pricing and butter
(butterfat), which constitutes Class IV pricing.
Class III vs. Class IV
10.50
11.20
11.90
12.60
13.30
14.00
JFMAMJJASOND
($/cwt.)
Class III Class IV
How is the Class III Milk price established?
NASS conducts weekly industry-wide surveys on cheese, whey, and butter cash
transactions. These prices are volume-weighted and incorporated into a pricing
formula to determine the monthly Class III price for milk with 3.5% butterfat. On
Friday of each week, the USDA reports the changes in the average prices from the
prior week. Both traders and hedgers can monitor this information to gain insight as
to the final cash settled price.
How is the Class IV Milk price established?
NASS uses weekly industry-wide surveys on butter, whey, and nonfat dry milk cash
transactions. These prices are volume-weighted and incorporated into a pricing
formula to determine the monthly Class IV price for milk with 3.5% butterfat. On
Friday of each week, the USDA reports the changes in the average prices from the
prior week. Both traders and hedgers can monitor this information to gain insight as
to the final cash settled price.
What are the classifications of Milk?
Class I
Milk used to produce fluid milk products, such as bottled milk.

Futures Example: Buy low/sell high, or vice versa
As a speculator, if you think prices are going higher, then you would buy Milk
futures. If you think prices are moving lower, then you would sell Milk futures. To
close out or offset your trade, take the opposite position.
1
All futures contracts require a fulfillment, or binding obligation, on the part of the trader at some time before the contract
expires. Traders of the Milk contract may fulfill contract obligations by offsetting in the futures market (entering an opposite
trade order) any time prior to contract expiration, or by accepting an automatic offset at the Class III announced price on the
date of the announcement.