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Reallocation of price risk among members

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  • Pedersen, Michael Friis
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    Abstract

    Marketing of milk and meat in Denmark is dominated by two large cooperatives, Arla Foods in the dairy sector and Danish Crown in the pork sector. Members in these cooperatives practically have no possibility for price risk management on their main product. Futures markets for dairy and pork are not utilised, and it is suggested that the reason is prohibitively large basis risk. The events following the global financial crisis suggest increased need for price risk management in Danish agriculture. Since futures markets do not seem to be a viable solution, the paper explores an alternative. Reallocation of price risk among members in marketing cooperatives. Endowing members with a forward contracted share of delivery, and allowing for transfer at a market price will lead to reallocation gains if member heterogeneity in cost of risk is great enough and transaction costs are low enough.

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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 123rd Seminar, February 23-24, 2012, Dublin, Ireland with number 122529.

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    Date of creation: 23 Feb 2012
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    Handle: RePEc:ags:eaa123:122529

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    Related research

    Keywords: futures; hedging; risk management; marketing cooperatives; Agribusiness; Risk and Uncertainty; G13; G32; Q13; D61; D8;

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    1. Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May.
    2. Philip Garcia, 2004. "A selected review of agricultural commodity futures and options markets," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 31(3), pages 235-272, September.
    3. Jean-Paul Chavas, 2011. "Agricultural policy in an uncertain world," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 38(3), pages 383-407, August.
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