A note: The CSCE cheddar cheese cash and futures price long-term equilibrium relationship revisited

In the early 1990s, after four decades of relying on government mandated mi nimum price supports and public stockholding to achieve price risk manageme nt, the United States dairy industry is undertaking a shift to a market cle aring equilibrium system. A potentially important component of this new str ucture is the development of an operational futures market for selected mil k and dairy products. In June of 1993 the Coffee, Sugar, & Cocoa Exchange i ntroduced a contract on Cheddar Cheese. As the production of cheese represe nts over one third of the use of raw milk in the United States, this contra ct has the potential of serving as an important price risk management tool. Using unit root and cointegration techniques, Fortenbery and Zapata studie d the cheese cash-futures relationship over the period June 1993-July 1995. They reach the conclusion that the cash and futures markets, during the pe riod of their analysis, had not established an economic equilibrium relatio nship. F&Z raise the important question as to whether the cheddar cheese ma rket is in some sense "slow" to develop or whether there something fundamen tally amiss. The work of F&Z provides an important initial step toward unde rstanding the cash-futures relationship. This research revisits the existen ce of a cointegrating relation using a much longer time period and addition al time-series statistical tests. The results of this study suggest that th e data support the establishment of an equilibrium relationship in the chee se markets and therefore provide support for the use of the futures market as a price risk management tool by the dairy industry. (C) 1999 John Wiley & Sons, Inc.