The past three months brought unprecedented volatility to dairy markets due to the coronavirus pandemic. It is unprecedented, because CME Class III futures traded at both the lower and upper market limits.

What does that mean?

For dairy, if a Class III contract moved a full 75 cents in daily trading, then a “circuit breaker” would be tripped and trading was immediately ended for the day on that contract. The next day, trading continued. This market shutdown traces back to trading strategies developed in the Great Depression when fear and panic drove markets into a vicious downward spiral.

As of June 1, the 75-cent limit has been changed on those Class III contracts.

Day Two could become $1.50
“Should any Class III Milk futures contract month settle at the limit ($0.75), the daily price limits for all contract months shall expand to $1.50 per cwt. on the next business day,” the CME published in “Understanding prices limits and circuit breakers.”

“If none of the listed Class III Milk futures contracts settle at a price change equal to or greater than 75 cents per cwt. on the next business day, daily price limits for all contract months shall revert back to 75 cents per cwt. on the following business day.”

More market triggers
Class III, cash settle cheese such as spot Cheddar blocks and barrels, and dry whey could each set their own trigger and impact all other dairy contracts.

“Should the futures component of the Class III Crush (Class III, Cash-Settled Cheese, Block Cheese, and Dry Whey) trigger an expanded limit, the daily price limits for other futures components shall also expand on the same day. If no futures component settles at a price change equal to or greater than its respective initial price limit, daily price limits for all futures components of the Class III Crush shall revert to their respective initial limits the following business day,” wrote CME officials.

Additional limits
Here are the “Day One” and “Day Two” limits for the following products:

• Nonfat Dry Milk: 4 cents per pound and 8 cents per pound.
• Class IV Milk futures: 75 cents per pound and $1.50 per pound.
• Cash-settled butter: 7.5 cents per pound and 15 cents per pound.
• Dry whey futures: 4 cents per pound and 8 cents per pound.
• Cheese Futures: 7.5 cents per pound and 15 cents per pound.
• Block Cheese Futures: 7.5 cents per pound and 15 cents per pound.

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(c) Hoard's Dairyman Intel 2020
June 8, 2020
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