Characterizing Distributions of Class III Milk Prices: Implications for Risk Management
Descriptive statistics and time-series econometric models are used to characterize the behavior of monthly fluid milk prices. Prices in April, May and June appear to be more variable than those in subsequent months, and the spring-time prices are perhaps skewed. Econometric models can capture the historical behavior of spot prices, but forecasts converge to the marginal distribution of the sample prices in about six months. Futures prices for Class III milk have the expected time-to-maturity effect and converge to the respective monthly distributions of the cash prices at contract maturity (as they must, since the contracts are cash settled). Thus, econometric models and futures quotes provide similar information about price behavior at contract maturity. Routine hedges in futures, especially those made four or more months prior to maturity, reduce the variance of returns, but over a period of years, lock-in an "average" return. While econometric models and futures quotes provide imprecise forecasts, they can be used in conjunction with historical data to determine whether expected prices are high relative to past experience. This may assist with making decisions about selective hedging. Likewise, historical evidence may be useful in evaluating expected returns from the use of put options. Results from simple hedging strategies using either futures or puts are illustrated, but more work is needed to evaluate "optimal" portfolios for dairy farmers.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202|
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Harvey Lapan & Giancarlo Moschini & Steven D. Hanson, 1991.
"Production, Hedging, and Speculative Decisions with Options and Futures Markets,"
American Journal of Agricultural Economics,
Agricultural and Applied Economics Association, vol. 73(1), pages 66-74.
- Lapan, Harvey E. & Moschini, GianCarlo & Hanson, Steven D., 1991. "Production Hedging and Speculative Decisions with Options and Future Markets," Staff General Research Papers Archive 10810, Iowa State University, Department of Economics.
- Hanson, Steven D. & Myers, Robert J. & Hilker, James H., 1999. "Hedging With Futures And Options Under A Truncated Cash Price Distribution," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(03), December.
- Miranda, Mario J & Glauber, Joseph W, 1993. "Estimation of Dynamic Nonlinear Rational Expectations Models of Primary Commodity Markets with Private and Government Stockholding," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 463-70, August.
When requesting a correction, please mention this item's handle: RePEc:ags:aaea05:19322. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.