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The classified pricing of fluid milk under the Federal Milk Marketing Orders (FMMO) system combined with the cash settlement feature of Class IIII milk futures contracts generate a unique volatility pattern of these futures markets in the sense that the volatility gradually decreases as the USDA price announcement dates approaching in the month. Focusing on the evolution of volatility in Class III milk futures market, this study quantifies the relative importance of a set of factors driving milk price variation. While volatilities in both corn futures market and financial market Granger-cause the milk price volatility, the impact of financial market is more persistent. Besides embedded seasonality, market demand and supply conditions in the dairy market, cheese in this case, as well as changes in the U.S. exchange rates are found to have positive and statistically significant impacts on milk price volatility. While speculation positively affects milk futures markets, the effect was found insignificant.


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