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Analysis of Price Risk Management Strategies in Dairy Farming Using Whole-Farm Simulations

Published online by Cambridge University Press:  26 January 2015

James Neyhard ,
Loren Tauer  and
Brent Gloy
James Neyhard
Affiliation:
Charles H. Dyson School of Applied Economics and Management, Cornell University, Ithaca, New York
Loren Tauer
Affiliation:
Charles H. Dyson School of Applied Economics and Management, Cornell University, Ithaca, New York
Brent Gloy
Affiliation:
Department of Agricultural Economics, Purdue University, West Lafayette, Indiana
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Extract

Combinations of futures and options contracts on milk and feed were simulated to determine their influence on a representative dairy farm's ability to meet cash flow requirements and reduce the variance of net income. Compared with the reference scenario of selling milk and procuring inputs on a monthly cash basis, the risk management activities did not result in a significant change in either the level or variance of net farm income. The results suggest that on average the current marketing procedure of monthly cash milk pricing and monthly feed purchases (and pricing) produces a strong built-in natural hedge for dairy farmers.

Keywords

dairy riskfutureshedgingoptionssimulationD22Q12Q13
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 45 , Issue 2 , May 2013 , pp. 313 - 327
Copyright
Copyright © Southern Agricultural Economics Association 2013

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