Speculators on the Chicago Mercantile Exchange are buying up out-of-the-money call options in anticipation of dairy price supports going to 75% of parity early next year.
If current Farm Law expires next Monday, the level of dairy price supports (currently at about $9/cwt) reverts to permanent, 1949 Farm Law. That law stipulates that dairy prices be supported at 75% to 90% of parity. In November, the parity price for milk was $52.10/cwt. So 75% of that would be $39.
"People are buying options from 1¢ to 30¢ that could make them $10/cwt. if we see parity pricing," report the editors of the FC Stone’s Dairy Group in today’s FC Stone Early Morning Report.
"While the odds are probably 1% or less of this materializing, it isn’t often a money manager has any chance of making that much on a trade and thus it would be foolish to not take some sort of punt on this."