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A Direct Hedge of Forward Exposure to the Price of Cheese
To better meet the price risk management needs of dairy companies, CME Group is adding
Cheese futures and options to its suite of dairy contracts.
Based on domestic cheddar cheese, these new contracts will enable direct hedging of forward
exposure to the price of cheese. They will be cash-settled, traded electronically on CME
Globex, and block trade eligible.
Cheese represents the third component of the Class III Milk “crush” – the separation of the raw
product into its components. Class III Milk, reflects the input cost of the crush, and cheese and
dry whey represent the product and by-product values respectively. Thus, all products in this
crush will be available for direct hedging. The Cheese futures price will reflect the market’s
valuation of cheese at a forward date.
Cheese consumption has been increasing in the United States. The size of the domestic
cheddar cheese market is estimated at between $5.5 and $6.3 billion U.S. dollars. Dairy prices
depend upon supply and demand, as well as herd expansion or contraction. Given the time
required for breeding and raising animals for milk production, the supply of milk can be difficult
to control and its forward price challenging to anticipate. As a result, Cheese futures and
options are expected to offer numerous trading opportunities, and to be useful hedging tools for
a variety of market participants.