Producer-Level Hedging Effectiveness of Class III Milk Futures

Mailbox milk prices from a representative dairy operation in Illinois are used to gauge the farmlevel hedging effectiveness of Class III milk futures traded on the Chicago Mercantile Exchange. Predominantly used by manufacturers and end users to price cheese, the Class III milk futures are not frequently utilized by producers. The presented analysis shows that the Class III milk futures do provide an effective producerlevel hedge: a hedge ratio of 0.85 can reduce price risk by over 90 percent. The importance of seasonal basis components for individual producers is highlighted.