ANALYSIS OF EXPECTED PRICE DYNAMICS BETWEEN FLUID MILK FUTURES CONTRACTS AND CASH PRICES FOR FLUID MILK

The objective of this study is to provide an empirical evaluation of the expected relationship between cash and futures prices for fluid milk. This is done using historic cash prices from 1988 to 1995, and making inferences about how futures prices would have behaved if they had traded during this sample period. Futures prices are simulated over the sample period based on two assumptions about futures market behavior for fluid milk. The first is that the futures market will essentially price the Basic Formula Price (BFP). The BFP is an estimate of the previous month's pay price for Grade B manufacturing milk in Minnesota and Wisconsin adjusted for contemporaneous changes in the prices of manufactured milk products. It establishes the federal milk marketing order minimum Grade A pay price for Class III milk used to make cheese, and is the mover of both the minimum Class II price for milk used in soft manufacturing products and the minimum Class I price for beverage milk (Jesse).