Within all industries, the transparency and availability of pricing information is critical to the ability of the market participants to carry out their operations, develop business forecasts, market their products and manage risk. Such is the case with the dairy industry.
There are federal guidelines and procedures instituted for the dairy industry to facilitate market efficiency and price discovery. For those interested in trading CME Group Dairy futures and options, it is important to be aware of these factors due to their impact on both cash and futures prices.
The Dairy Product Mandatory Reporting Program was developed by the USDA to provide more timely, accurate and reliable pricing data in Federal Milk Marketing Order formulas. The Federal Milk Marketing Orders mandate the minimum prices that processors are required to pay farmers for milk.
Mandatory price reporting became law in 2010 and requires entities that participate in the manufacture and sale of cheese, butter, nonfat dry milk and dry whey to report transactional information to the USDA’s Agricultural Marketing Service (AMS) on a weekly basis.
The AMS collects the data via a survey that guides manufacturers on what type of sales they should include and which to exclude, as well as the product and type of packaging. The survey also requires the reporting facility to list the plant location that the product is sold from, pounds of product, and total dollars or dollars per pound.
Only a manufacturer that processes and markets 1 million pounds of dairy products per year is required to report data. Certain sales, such as intra-company, re-sales and subsidized export sales, are excluded from the survey to ensure that only sales to the first, bona fide, end-users are reported.
Under law, each survey response is mandatory, confidential and subject to verification for accuracy. Only the U.S. Secretary of Agriculture or the U.S. Attorney General has access to the reports for enforcement purposes, to ensure compliance with the Dairy Product Mandatory Reporting program.
USDA AMS publishes the weekly product prices and volumes in the “National Dairy Products Sales Report” (NDPSR) which is available on the USDA website. The data contained in the weekly NDPSR is used to calculate the monthly class and component prices, which appear in the USDA-AMS “Announcement of Class and Component Prices” report. The monthly class and component prices are then used as the settlement prices for the CME Group Dairy futures contract.
Rather than calling for the physical delivery of milk or dairy products, CME Group Dairy futures contracts are financially settled based upon the USDA-AMS monthly class and component prices, as first reported. If, for any reason, the report is revised, the prices from the initial report are used to settle the contracts. The last trading day for all dairy futures is the day prior to release of the USDA-AMS report.
USDA-AMS uses a specific process to ensure that the correct weekly prices are used to calculate the class and component prices included in the monthly report.
The report is released no later than the fifth day of the following month. If the release date does not fall on the fifth, the most current release preceding the fifth will be used in the settlement price calculation. Based on this guideline, the report may be released either at the end of the current month, or at the beginning of the next month. The last day of trading and the settlement for Dairy futures then take place
Settlement prices for June 2017 futures contracts were released on June 28, 2017, and are comprised of prices reported for the weeks ending June 3, June 10, June 17 and June 24. On the other hand, settlement prices for the July 2017 futures contracts were released on August 2, 2017, and include prices reported for the weeks ending July 1, July 8, July 15, July 22 and July 29.
In summary, the prices reported in the Dairy Product Mandatory Pricing program are used for dual purposes: for the Federal Milk Marketing Order system and the cash-settlement procedure for Dairy futures.
This means that the dairy markets are being actively monitored at two levels: the Federal level, where the USDA seeks to ensure that the prices are accurate so that dairy farmers are paid a fair price for their milk and at the CME Group level, where the exchange takes steps to ensure that the settlement prices for Dairy futures accurately reflect the market for this vital industry, facilitating their efficiency as risk management and trading tools.