What is Open Interest?
By Mike North, Commodity Risk Management
There are a lot of different words and terms that get kicked around in the markets these days, many of which are like another language to most folks. Among them there is one particular reference point that I’d like to focus on: open interest.
At the Exchange, open interest is the measurement of the amount of open and outstanding contracts held by buyers and sellers that have yet to be offset. In other words, positions that have been put on and have not yet been taken off. A rising open interest alerts us to the fact that more buyers and sellers are willing to come together to take an interest in the milk market.
As markets move, it gives us insight as to which of those parties has the greatest influence in that price discovery process. As we observe the open interest among the commodities that make up the CME dairy complex, last week’s activity added to that open interest with one exception, Class IV milk. That knowledge coupled with the fact that prices moved lower through most of the week in many of those categories, gives insight to the fact that sellers were the largest driving force in the price discover process. Should that trend continue, we are reminded that there is ongoing risk in Class III and Class IV milk.
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