Dairy commodities is a collective term for dairy-based products, which are being traded on exchanges around the world. The following dairy products are currently traded as a commodity:
- Milk Class 3: this is milk used mainly for the production of cheddar cheese.
- Milk Class 4: this type of milk is used in the production of butter and non-fat dry milk.
- Milk Powder: this product is created by evaporating milk to dryness.
- Non-Fat Dry Milk: a type of milk that can be stored and be used in various food production processes.
- Butter: the basic form of butter which can later be refined into the various variations available in grocery stores.
- Dry Whey: a by-product of the milk-production process. This commodity is used in bread, cereal and protein bars.
History of dairy
The first dairy product was milk, produced by goats. Humans have been keeping goats for milk-production since 8000-9000 years B.C.E. Goats were the first domestic animals for milk-production, because of their smaller size than cows and ability to eat nearly anything. This made them highly effective for food production. During the years people began using various animals for their milk producing capacity, based on available feed and the climate. From around 3000 B.C.E. humans started breeding cows, goats and sheep specifically for the production of their milk. Understanding that milk is a far more effective type of food in comparison to meat.
The creation of various dairy products derived from milk, were mostly discovered by accident. Butter was discovered by shepherds who carried milk in bottles. During their walks with their herd the milk would be shaken continuously. This would eventually result in butter, which people then started to produce with the help of tools.
Yoghurt was another dairy product, which was discovered by accident. When the shepherds carried the milk in a bottle and this would shake during their walks, a layer of cream would have separated on top of the milk. When they would remove this layer cream, the resulting product would be yoghurt. After discovering yoghurt, they soon learned that by separating the liquid from the yoghurt, the resulting product would be cheese.
Dairy commodities is a collective term for a number of products, which will be listed below. This will offer insight in the production process, storage and handling methods and uses of each product.
1. Skimmed milk powder
Skimmed milk powder or simply called milk powder is basically dried milk, which is dried in order to preserve it. Furthermore transporting milk powder is economically advantageous as the bulk is significantly reduced.
Skimmed milk powder is produced by evaporating milk. The most common method is by spray drying. In this process the milk is loaded into a heated chamber, where gas is pushed through. This gas creates very high temperatures which causes the liquid to vaporize, resulting in small solid milk powder particles. The remaining liquid is removed from the container through a nozzle and what remains is milk powder. The powder must be stored in a manner, where the moisture, heat, light and oxygen levels can be controlled, as they will lower the quality of the product. This offers two types of containers to store the powder in: plastic-lined multi-walled bags (25 kg) or bulk bins (600kg).
Milk powder is used in a variety of applications. It is an important ingredient in infant formula, chocolate, baked goods and ice cream. Milk powder is also a much-used item in survival food packs as its shelf-life is considerable and the bulk size is limited.
Although there are numerous variations of cheese, future contracts for cheese are based on American cheddar. Price fluctuations of this type of cheese influence all other types, traded in the United States and is therefore suitable as a benchmark.
The production process of cheese is comprised of a number of basic steps. Despite the numerous cheese flavors the basic steps remain unchanged for cheese production. The production starts with milk, to which good bacteria, called rennet, are added. This enzyme greatly aids in coagulation of the milk, altering the milk to a more solid substance. In the next step the liquid (whey) is removed from the milk solids (curd). The curd is then cooked and stirred, removing the final remains of the liquid. The curd will now be salted and stacked into moulds in order to create the desired form of the cheese. The cheese remains in a mould for three to twelve hours, depending on the size. The final step is the aging of the cheese. The aging period can take up to ten years and is performed in a controlled area to maintain a suitable level of moisture. The flavor of the cheese can be determined by the aging period and by adding any additional herbs or ingredients.
Cheese is known as a healthy and tasteful food source. The numerous variations of cheese make it a useful ingredient in a wide range of products. First of all, cheese can be consumed on itself as flavored cheeses are considered a delicacy. Furthermore it is used in many products such as: pizza, cheeseburgers, additions to salads, cheese fondue and is used in many types of cake and pie.
Trading of dairy
Trading of dairy commodities takes place on the Chicago Mercantile Exchange (CME). The trading activities are highly regulated by the government. The government has established a guaranteed minimum price for various dairy commodities, thus functioning as a floor price. This regulation is slowly being decreased in order to increasing free market workings. This has resulted in a higher volatility over the last years and thus an increased risk.
The prices of dairy commodities is slightly different from other agricultural commodities. The weather has a far smaller impact on the supply of dairy products as the animals will produce milk in any weather type. The price of dairy commodities is the result of an equilibrium of supply and demand and the impact of the numerous speculators on the exchange.
Regulations are influencing dairy prices significantly, although governments have started reducing their involvement in the dairy markets. There are two types of governmental influence in the dairy markets: import/export limits and supported prices. The import/export limits controls the supply in a country and can therefore exercise impact on price creation. Government supported prices offer a minimum price for the producers and provides some security against extreme price drops. The reducing government involvement causes a higher volatility and thus greater risks.
The costs of feed has a direct effect on the price of dairy products. The feeding costs of the animals is a significant part of the total productions cost of dairy products. A rise in the costs will therefore have a considerable impact on the final price of dairy commodities. Monitoring the price evolution of animal feeder can provide an indication of upcoming dairy prices. The increasing use of grains in the production of biofuels also influences the pricing of animal feeder, as the grains are being divided between both parties.
CME powder milk and cheese future contracts
On the Chicago Mercantile Exchange (CME) the following dairy contracts are being traded:
|Cheese Future Contract (CSC)
|First 24 calendar months
|$0.001 per pound
|International Skimmed Milk Powder Futures (ISM)
|20 Metric Tonnes Skimmed Milk Powder (18 – 20MT Deliverable Variance)
|Jan, Feb, Mar, Apr, May, Jun, Jul, Aug, Sep, Oct, Nov and Dec
|$0.50 per metric tonne (= $10.00 per contract)