CME Group will launch trading in international skimmed milk powder futures and options contracts on Monday, as the Chicago-based exchange operator and others angle for a piece of a $6.7 billion global market.

The CME’s contracts will provide the dairy industry its first international risk management tools following wide swings in milk powder prices in recent years, the exchange said.

“As price volatility increased over the past several years, the need has grown for a skim milk powder futures contract to help industry participants better manage their risk,” said John Harangody, the CME’s director of commodity products.

“A number of our customers, including manufacturers, producers and multinational food companies, approached us about this contract,” Harangody said.

Demand for powdered milk is growing around the world, particularly in “emerging” regions such as Africa and Asia, CME said. Made from evaporated milk, powdered milk doesn’t need to be refrigerated and can be stored longer than in its liquid form.

CME, which already offers milk, butter and cheese contracts based on U.S. markets, already has some competitors on its tail.

Frankfurt-based Eurex Group plans to launch a European skimmed milk powder contract by the end of the second quarter. In June, NZX Ltd., the Wellington, New Zealand-based exchange operator, will begin trading in whole milk powder futures.

Dairy producers and processors say the timing is good for the new milk powder contracts, after tight supplies and rising demand whipsawed markets in recent years.

“It is exciting there is recognition for different mechanisms to mitigate risk,” said Ed Gallagher of Dairy Farmers of America, Inc., a Kansas City, Mo.-based marketing cooperative.

The contracts “create a lot of opportunity to help plants, end-users and farmers to manage volatility that brings costs to their business,” said Gallagher, who is president of the cooperative’s dairy risk management services. “I just don’t see volatility getting tamer. It’s getting wilder.”

Up until the past decade or so, U.S. government price support programs determined commercial prices for non-fat milk powder, Gallagher noted. Today, though, prices are largely determined by buyers and sellers on an open global market.

Skimmed milk powder prices in Oceania, a large region including islands in the Central and South Pacific, topped $5,000 per metric ton in July 2007 before sinking near $1,600 in March 2009. Prices are currently near $3,600.

Still, it remains to be seen whether there is enough milk powder trade to support three different contracts.

“There’s going to be growing competition for these types of contracts,” Gallagher said. “We’ll see if there’s enough volume for everyone.”

About 1.6 million metric tons of whole milk powder is traded globally every year, according to NZX’s Web site. New Zealand “dominates” the world market for whole milk powder, exporting around 700,000 metric tons annually, mostly to Asia, South America and the Middle East, NZX said.

The CME’s contract, delayed from a previously scheduled launch in April, includes 20,000 metric tons of skimmed milk powder and requires “physical” delivery at one of six locations: Los Angeles, Newark, N.J. and Seattle, along with Auckland, New Zealand; Melbourne, Australia; and Rotterdam, the Netherlands.

By contrast, the Eurex and NZX contracts are cash-settled, which may be preferred by speculators and other traders who have no interest in taking delivery of the actual product, analysts said.

The CME’s contract “holds some promise in helping traders cope with the volatility on world dairy markets,” said Ed Jesse, a professor of agricultural economics at the University of Wisconsin in Madison.

However, with the CME’s multiple delivery points, “traders will face a good deal of uncertainty in using the contract, which could limit interest,” he said. “Cash-settled contracts eliminate the delivery problem and potentially expand the range of traders to those who have no interest in the physical.”

“More important in my judgment is that the CME may be upstaged” by the NZX’s new contract, Jesse said.

The CME skimmed milk powder contract will be electronically traded on the exchange’s Globex system.

CME dairy trading is dominated by futures and options on Class III milk, an industry benchmark.

Class III milk futures and options trading averaged 1,950 contracts a day during the first four months of 2010, up 13 percent from the same period in 2009, according to CME figures.

The Class III trading accounted for more than 94 percent of futures and options activity in the CME’s dairy complex, which also include Class IV milk, dry whey and nonfat dry milk.

For more information on the CME’s international skimmed milk powder contract: