Sunday, May 16, 2010

Liquid Milk futures, a good thing?

I was reading today that liquid Milk futures contracts are now available on the Chicargo Mercantile exchange. However, with the level of subsidy of milk in Europe which distorts the price in effect sets a put option in favor of the processors of liquid milk, such a derivative won't be of much value inside the EU.

I did learn a few other interesting things about the milk industry, the most significant being that, no surprise, that UK farmers are much larger(3x) and more efficient than the rest of the EU. We produce the cheapest milk in Europe and are self sufficient in the stuff, but still import just under 1 billion worth of butter, cheese and yoghurt.

The upshot here is that liberalization of the EU dairy industry will greatly benefit todays UK dairy farmers (not those who have left the industry in the last 10 years because they can't make ends meet) and some of that will arrive in 2015 when quotas get phased out, though export subsidies for milk power and butter will remain.

This raises the question of who the existing subsides is there to help, the farmer or the milk processor. The answer may depend on which country you live in.

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