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Can Futures and Options Markets Hold the Milk Price Safety Net? Policy Conflicts and Market Failures in Dairy Hedging

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  • Leigh J. Maynard
  • Christopher Wolf
  • Matthew Gearhardt

Abstract

U.S. Department of Agriculture's Dairy Options Pilot Program promoted hedging by producers, and was a test case for similar programs in other agricultural industries. Rapidly shifting milk pricing policies impeded quantitative hedging evaluations while the program was active. Hedging appears capable of reducing price variance by 50–60% in most regions, and favors large, sophisticated producers in heavy cheese manufacturing regions. Forward contracting or price insurance products may offer lower transaction costs and attract more small-scale producers. Ballooning milk deficiency payments and milk's prominent role in trade-distorting payments suggest an ongoing need to promote private price risk management tools. Copyright 2005, Oxford University Press.

Suggested Citation

  • Leigh J. Maynard & Christopher Wolf & Matthew Gearhardt, 2005. "Can Futures and Options Markets Hold the Milk Price Safety Net? Policy Conflicts and Market Failures in Dairy Hedging," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 27(2), pages 273-286.
    • Handle: RePEc:oup:revage:v:27:y:2005:i:2:p:273-286
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    File URL: http://hdl.handle.net/10.1111/j.1467-9353.2005.00226.x
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    1. Burdine, Kenneth H. & Maynard, Leigh J., 2012. "Risk Reduction of LGM-Dairy and its Potential Impact on Production," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124180, Agricultural and Applied Economics Association.
    2. Mark, Tyler B. & Burdine, Kenneth H. & Cessna, Jerry & Dohlman, Erik, "undated". "The Effects of the Margin Protection Program for Dairy Producers," Economic Research Report 262192, United States Department of Agriculture, Economic Research Service.
    3. Mark, Tyler B. & Burdine, Kenneth, 2015. "Will the New Dairy Margin Protection Program Reduce Risk for Dairies?," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196878, Southern Agricultural Economics Association.
    4. Fernandez-Perez, Adrian & Frijns, Bart & Gafiatullina, Ilnara & Tourani-Rad, Alireza, 2022. "Profit margin hedging in the New Zealand dairy farming industry," Journal of Commodity Markets, Elsevier, vol. 26(C).
    5. Neyhard, James & Tauer, Loren & Gloy, Brent, 2013. "Analysis of Price Risk Management Strategies in Dairy Farming Using Whole-Farm Simulations," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 45(2), pages 313-327, May.
    6. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Mean-reversion in Income over Feed Cost Margins:Evidence and Implications for Managing Margin Risk by U.S. Dairy Producers," Staff Papers 132379, University of Minnesota, Department of Applied Economics.
    7. O'Connor, Declan & Keane, Michael & Barnes, Edel, 2008. "Managing Price Risk in a Changing Policy Environment: The Case of the EU Dairy Industry," 108th Seminar, February 8-9, 2008, Warsaw, Poland 48112, European Association of Agricultural Economists.
    8. Mosheim, Roberto & Blaney, Don & Burdine, Kenneth H. & Maynard, Leigh J., 2014. "Livestock Gross Margin-Dairy Insurance: An Assessment of Risk Management and Potential Supply Impacts," Economic Research Report 164606, United States Department of Agriculture, Economic Research Service.
    9. Burdine, Kenneth H. & Kusunose, Yoko & Maynard, Leigh J. & Blayney, Don P. & Mosheim, Roberto, 2014. "Livestock Gross Margin–Dairy: An Assessment of Its Effectiveness as a Risk Management Tool and Its Potential to Induce Supply Expansion," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 46(2), pages 245-256, May.

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