EEX Liquid Milk Futures Update – Aug ’18
The European Energy Exchange (EEX) recently recorded the first trade in their new liquid milk futures contract. In addition to the liquid milk futures, EEX also offers futures contracts for European butter, skim milk powder and whey powder. Financial settlement of the liquid milk futures are calculated by the EEX European Liquid Milk Index, consisting of an unweighted average of raw milk at real fat and protein contents paid to milk producers within Germany, the Netherlands, Denmark and Ireland. EEX liquid milk futures contracts cover a volume of 25,000 kg of liquid milk and have a price quotation in €/100 kg. The first recorded transaction settled at a price of €36.50/100 kg for the Oct ’18 expiry, the equivalent of $19.36/cwt at current exchange rates. Because the liquid milk futures settlements are based on raw milk prices, they are most comparable to U.S. all-milk prices. The two price series have exhibited a correlation coefficient of 0.74 since 2000 (R² of 0.55), with the EEX European Liquid Milk Index trading at a $2.83/cwt average premium to U.S. all-milk prices over the period. The EEX European Liquid Milk Index tracks closely with EU-28 Class III milk equivalent prices composed of European dairy product component prices provided by USDA and the U.S. Class III milk pricing formula. The EEX European Liquid Milk Index and EU-28 Class III milk equivalent prices have exhibited a correlation coefficient of 0.93 since the early 2000’s (R² of 0.86). Over the period, the EEX European Liquid Milk Index has traded at an average premium of $1.30/cwt to the EU-28 Class III milk equivalent prices. When accounting for this adjustment, the two price series track with a high degree of accuracy. EEX liquid milk futures contracts currently have price settlements through Mar ’20. The EEX liquid milk futures contracts are currently trading at an average premium of $1.86/cwt to the U.S. Class III milk forward curve over the period when adjusted to a $/cwt basis and accounting for the $1.30/cwt historical basis between the EEX European Liquid Milk Index and the EU-28 Class III milk equivalent prices. In comparison, the EEX European Liquid Milk Index traded at a $2.76/cwt premium to U.S. Class III prices since the beginning of 2018 when accounting for the same adjustments. Currently, only one contract of EEX liquid milk futures has traded, but additional updates will be provided if/when traded volumes increase.