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Chewing the Cud on Using Multi-Commodity Hedge Ratios To Manage Dairy Farm Risk

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  • Newton, John
  • Thraen, Cameron S.

Abstract

This study examines the risk management opportunities for regional mailbox milk prices and composite income-over-feed-cost margins using alternative milk and input cost risk management strategies. Multi-commodity hedge ratios are estimated using cash and futures market data over 2001 to 2013. Our analysis shows that at sufficient hedging horizons single- or multi-commodity hedge ratios may reduce up to 65% of the margin price risk, 39% of the milk price risk, and may outperform naïve pricing arrangements designed to replicate regulated milk pricing provisions. Cross-hedging using milk and feed futures is an imperfect hedge and remains exposed to basis risk due to the spatial value of feed and the regulatory burden of Federal and State milk pricing and pooling programs.

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Handle: RePEc:ags:n13414:285819
DOI: 10.22004/ag.econ.285819
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File URL: https://ageconsearch.umn.edu/record/285819/files/Newton_Thraen_Bozic_NCCC-134_2014.pdf
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