Milk Is Risky Business. Got Futures?

Doug Block, a dairy farmer for 45 years, says he grew up in an era when the price of corn feed for cows fluctuated by just 6¢ a bushel. The U.S. didn’t ship much cheese and butter overseas, and the government often bought cheese to buoy the market when prices sagged. Those days are gone. Block’s business depends on pasture conditions in New Zealand, Europe’s inventories, and China’s milk consumption. He also has to deal with wild swings in the market after the U.S. government scaled back support over the last decade.

So in the past decade or so, Block and others in the dairy business have increasingly been doing what corn farmers have done since at least the late 1800s. They’re hedging with futures, essentially locking in a price down the road. “More and more dairy farmers will participate, because it’s a needed form of risk management,” Block says. And it’s become a booming business: Outstanding futures and options contracts for butter as well as nonfat dry milk reached a record in April, according to CME Group.