Cheese Block Futures: Pricing Cheddar Blocks

Key Takeaways

• Cheese block futures trade on the CME in 20,000 pound lots and settle in cash, not by delivery.
• Settlement uses the USDA National Dairy Products Sales Report monthly average for 40 pound cheddar blocks.
• Cheese prices drive Class III milk through the USDA pricing formula, so the two markets move together.
• Treating block and barrel cheese as one price misses that they trade as distinct grades with their own spread.

What It Is

The cheese block futures contract trades on CME Group under the symbol BLK. Each contract covers 20,000 pounds of cheese, representing the equivalent of 40 pound cheddar blocks. The contract is cash settled, so no cheese is delivered on the exchange.

Prices are quoted in U.S. dollars per pound. The minimum price move is 0.0010 dollars per pound. Settlement is based on the monthly weighted average price for 40 pound block cheddar reported by the USDA National Dairy Products Sales Report, which surveys actual wholesale sales.

The Intuition

Cheese is the largest single use of U.S. milk, so the price of cheddar blocks sits near the center of the whole dairy market. A cheesemaker who sells blocks faces price risk between making the cheese and selling it. A food company that buys cheese as an ingredient faces the opposite risk. Cheese block futures give both sides a way to lock the price.

Because the contract settles to a published USDA average of real sales, it reflects the actual wholesale market rather than a single negotiated deal. That makes it a clean reference for anyone whose business rises or falls with cheese prices.

How Cheese Block Futures CME Work

At expiration, open contracts settle in cash against the USDA monthly weighted average price for 40 pound cheddar blocks. Before expiration the price floats with expectations about cheese supply and demand, which in turn depend on milk production and buyer activity.

Contract value = 20,000 lb x cheese block price per pound

Cheese block futures and Class III milk futures are tightly linked. USDA calculates the Class III milk price largely from cheese and whey values, so a rise in block cheese feeds almost directly into a higher Class III price. Traders often watch the two together, using cheese as the leading product price and Class III as the milk it implies.

The contract carries daily price limits that can widen when the market settles at the limit and then revert once volatility cools. Cash settlement to a government report means there is no physical cheese to store or deliver and no warehouse basis to manage.

Worked Example

Suppose the front month cheese block contract trades at 1.80 dollars per pound. One contract is 20,000 pounds, so its value is:

1.80 dollars x 20,000 lb = 36,000 dollars per contract

Now consider a food maker that will buy 200,000 pounds of block cheese next month, which is 10 contracts. To lock the price, the maker buys 10 contracts. If the USDA monthly average comes in 0.15 dollars per pound higher, the long futures position gains:

0.15 dollars x 20,000 lb x 10 contracts = 30,000 dollars

That gain offsets most of the higher cash cost the maker now pays. Because the contract is cash settled, the position simply closes against the USDA reported price.

Common Mistakes

1. Lumping block and barrel cheese together. Blocks and barrels are distinct grades with their own prices. The block to barrel spread moves on its own.

2. Ignoring the Class III link. Cheese values feed the USDA Class III milk formula, so block cheese and Class III milk rarely move far apart.

3. Expecting delivery. The contract is cash settled to a USDA report. There is no cheese to deliver and no storage basis.

4. Misreading the settlement timing. Final settlement uses a monthly average, so the expiring contract resolves on a published figure rather than the last screen print.

5. Overlooking export and stocks data. Cheese inventories and exports shift the supply balance, so cold storage and trade data matter for the price.

Frequently Asked Questions

What are cheese block futures CME in simple terms? They are standardized contracts to buy or sell 20,000 pounds of cheddar block cheese at a set price. Cheese block futures CME settle in cash against a monthly USDA price for 40 pound blocks.

How do cheese block futures affect investment decisions? Cheesemakers and food companies use them to hedge the price of block cheese, while traders use them to take a view on dairy supply and demand. A price move changes revenue or cost for anyone exposed to cheese.

What is a real-world example of cheese block futures moving? A jump in cheese demand or a drop in milk production can lift block cheese prices, which then pulls the closely linked Class III milk price higher through the USDA formula.

How can investors use cheese block futures effectively? Track milk production, cheese stocks, and exports, and watch the relationship with Class III milk, since cheese leads the milk price. Plan around the monthly USDA report that sets settlement.

How is cheese block different from Class III milk futures? Cheese block futures price the finished 40 pound cheddar product directly, while Class III milk futures price the raw milk used to make cheese and settle to a USDA derived milk price. One is the product, the other the input.

Sources

1. CME Group. "Block Cheese Futures Contract Specs." https://www.cmegroup.com/markets/agriculture/dairy/block-cheese.contractSpecs.html
2. CME Group. "CME Block Cheese Futures, A New Hedging Tool." https://www.cmegroup.com/education/articles-and-reports/cme-block-cheese-futures-a-new-hedging-tool
3. CME Group. "Introduction to Hedging with Dairy Futures and Options." https://www.cmegroup.com/trading/agricultural/files/introduction-to-dairy-futures-and-options.pdf
4. USDA Agricultural Marketing Service. "CME Group Dairy Pricing." https://www.ams.usda.gov/sites/default/files/media/FMMO_CME_1.pdf

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.