Futures trading was becoming as common to United States dairy farmers as feed and financial planning.
Farmers could either sign up to a futures contract through their dairy co-operative, or deal directly through a broker with the futures traded on the 150-year-old Chicago Board of Trade, owned by the CME Group.
The vice-president of specialist dairy product broker FCStone, Thomas Gaughan, told journalists in Chicago that typically dairy farmers hedged the price on 25% to 30% of their milk production, but some had hedged all their milk for short periods, such as a month.
Futures trading was a contract to buy or sell products for up to two years in the future.
He said just 3% of futures contracts were ever acted on.
"It's about money changing hands, rather than product."
The NZX has plans to start trading in dairy futures, something the Chicago Board of Trade has been doing since 1996.
Chicago, in the United States mid-west agricultural heartland, was the home of commodities trading, given its proximity to the corn and other commodities.
Contract selling, then futures trading, started in the late 1800s, after growers would take their crops to Chicago to sell, only to find the price had fallen.
They were forced to dump it rather than take it home, but introduced price contracts, which led to futures trading.
Mr Gaughan said futures was not a case of trying to beat the market.
Rather, it was protecting against the risk of falling income once farmers had reached the point of harvesting their crop.
In the past year, US milk prices had fallen below the historic break-even point of about $5.50 a kg milk solids, while costs were still 30% above the cost of production.
Mr Gaughan said the futures market mirrored the cash market, but some farmers had protected their incomes by locking in a milk price higher than current prices.
Dairy was a niche market, and Mr Gaughan said a reference point for dairy futures was provided by Federal Orders, which each Friday stated what it believed the dairy price should be.
Investors could then express their opinion through the futures market on where they believed the market was headed.
"They vote with their orders," he said.
That "economic function" sent a message to producers about whether there was too much or not enough product.
Mr Gaughan said Fonterra's globalDairyTrade monthly auction was closely watched by the futures market, because it was a form of price discovery and price dissemination.
Just 8% of the US dairy production was traded on the future's market, compared with 50% of the nation's corn crop.
Dairy tended to be more volatile than corn because corn was harvested once a year, whereas farmers could ramp up or cut dairy production depending on the price signals, he said.
