Dow Jones Newswires | Traders, get ready for some big yellow
bricks — and not the ones at Fort Knox.

CME Group Inc.  in June aims to launch futures and options on cheese,
targeting big multinational food companies grappling with cheese prices
that have been anything but solid in recent months.

These companies have been working with a blunt instrument: Milk contracts that don’t take into account the byproducts created in the cheese-making process.

“That’s a big source of frustration,” said Brian Rice, principal of Chicago-based brokerage Rice Dairy LLC. “That extra whey component is enough to keep people out of the market.”

One cheese futures contract will represent 20,000 pounds of domestic cheddar cheese. Futures will be financially settled, which means parties won’t have the option of taking physical delivery.

The cheese market’s planned June 20 debut has won the support of big buyers of dairy products such as Kraft Foods Inc.

“It will provide an additional risk-management tool for both dairy farmers and cheese buyers when it launches in June,” Kraft Foods spokeswoman Renee Zahery said Wednesday.

Cheese futures could be seen as a sweet spot for the onetime Chicago Butter and Egg Board, but previous ventures into the market have failed.

Issues with contract design and cheese buyers’ nascent familiarity with futures trade hindered growth, Rice said, and most hedging of cheese-related price risk has been done through CME’s Class III milk contracts, introduced in 1996.

CME’s new cheese futures and options arrive as a recent surplus in cheese has proven a headache for the dairy market.

As the financial crisis broke in late 2008, commodities prices slumped, prompting farmers to direct more milk toward making cheese and powdered milk and their longer shelf lives.

That supply, coupled with continued production from milk cows, has dragged dairy prices lower and prompted a $60 million cheese purchase by the U.S. Department of Agriculture in December, part of broader efforts to subsidize dairy farmers. The cheese that was bought went to needy families, according to the USDA.

CME’s futures and options on cheese will round out its stable of products based around Class III milk,  produced exclusively for cheesemaking. CME already offers contracts on dry whey, the byproduct of cheese production and a key ingredient in high-protein power bars.

“In the past few years, we’ve had requests from the processing side of the business to introduce a cheese futures contract so they can have a risk product that more directly correlates to their exposure, which is the price of cheese,” said John Harangody, director of commodity products for CME.

Rice said the advent of a cheese-specific risk-management tool could recruit more commercial participants to the market — specifically big, publicly traded food companies that can’t hedge cheese risk through Class III milk contracts because of accounting rules.

It’s another question whether the products will draw interest from non-commercial investors, which have become central to providing liquidity in the biggest commodities markets such as crude oil.

“Cheese futures may have significant hedging appeal, but I would be a little questioning about its speculative appeal,” said Larry Schneider, director of sales and marketing at Chicago-based brokerage Zaner Group. “You need a marriage of both to make a successful market.”