Before we get into the meat of this week’s article, I wanted to briefly reflect on the more than 20 years that I have been attending the annual CheeseCon, or what many in the industry have simply called “Cheesemakers,” my favorite conference of the year. It is always great to be in Madison or Milwaukee in April and gather with cheese industry participants to discuss the latest production or demand trends and opine on where block and barrel Cheddar prices are heading in the future. I can remember those early days back in La Crosse, before the Wisconsin
Cheese Makers Association had to permanently move the show because it outgrew the venue.
During most of my career, whether I was back in those early days with the Downes-O’Neill Group, or Sara Lee, FCStone, Winona Foods, and finally founding HighGround Dairy back in 2012, I have had an outstanding relationship with Susan Quarne and the team at Cheese Market News. They have let me offer up my 2 cents to the industry for a very long time, and I am incredibly appreciative of their support over the years.
And given that we are in reflection mode, the dairy industry is less than two months away from transitioning to a “new era” of cheese pricing and risk management, with the federal milk marketing order enacting the greatest changes to milk pricing formulas in nearly 25 years. As a result, this is creating the biggest adjustment to how cheese price risk can be managed in more than nearly 15 years, dating back to when the Chicago Mercantile Exchange (CME) launched the cash-settled cheese (CSC) futures contract in 2010.
Simply put, USDA will be REMOVING the 500-pound barrel Cheddar cheese price from the Dairy Product Mandatory Reporting Program survey. This means that as of June 11, 2025 — the first weekly National Dairy Products Sales Report that will be used for June 2025 formulas — USDA will just publish a 40-pound block Cheddar price, and that will be the ONLY cheese value used to calculate the Class III milk price. With barrel Cheddar being removed, cheesemakers that produce barrels are adjusting how they price to their customers, pivoting from using a CME barrel Cheddar average to a block Cheddar average, and in turn, process cheese manufacturers are passing that change to their customers.
If you are a 500-pound barrel Cheddar or process American cheese buyer or seller, your world is about to change, but I believe it is changing for the better. And if you are a buyer or seller of any natural cheese that is already priced off the CME spot block Cheddar index, leveraging the CME’s cash-settled cheese futures market will now provide an extremely high correlation for price risk management, removing cumbersome basis risk that has been in the market for years.
Starting this June, cheese market participants will no longer worry about a wide, inverted or volatile block/barrel spread negatively impacting milk input costs or altering the effectiveness of their hedges. While some hedgers may stick with over-the-counter (OTC) swaps, the reality is that the CME’s CSC futures contract will now have an extremely high correlation (well above hedge accounting effectiveness standards) to the previous week/month CME spot block Cheddar price that virtually all varieties of cheese will use as its base index to purchase and sell physical product. With the cheese industry leveraging a single index, liquidity in futures and options will increase, providing market participants with more volume to get large trades done, and at more competitive prices.
While there is a lot of good news that will be a win-win for the industry, there are still some challenges in the near term. The daily CME barrel Cheddar spot call market will remain in existence, allowing for physical loads of product to transact. This will likely create some confusion, as those daily settlements/weekly averages will have no relevance when calculating milk input costs. Also, those that deal in regular movement of barrel Cheddar or process cheese will find it more difficult to manage basis risk without an index tied to its exact specification.
That said, simpler pricing formulas are better, and the certainty of USDA’s implementation is better as well, which will bring further investment into the dairy commodity derivative markets. USDA’s nearly two-year process to bring these rule changes to fruition is now within reach, and simplifying the cheese price calculation will also generate new interest from commodity funds that have long stayed away from dairy due to its complexity.
I am excited for the new federal milk marketing order rule changes to kick in this June as the industry has been craving these solutions for a long time, and I am confident they will open a new era of growth for cheese price risk management for years to come.
Reprinted with permission from the April 11, 2025, edition of CHEESE MARKET NEWS®; © Copyright 2025 Quarne Publishing LLC; (608) 288-9090; www.cheesemarketnews.com
