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Will the Margin Protection Program for Dairy Producers Crowd Out Dairy Futures and Options?

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  • Yang, Fanda
  • Bozic, Marin

Abstract

The Margin Protection Program for Dairy Producers, created under the Agricultural Act of 2014, introduces a new margin insurance program that pays dairy producers when national incomeover- feed-cost margin declines below elected coverage level. A potential side effect of the program is that it may crowd out hedging using CME dairy futures and options. We analyze this issue under the assumption that hedging and Margin Protection Program are utilized by dairy producers as a protection against catastrophic margin risks. We model such behavior using safety-first preferences where farmers minimize hedge ratio subject to probabilistic constraint on revenue falling below a critical threshold level. We use Monte Carlo simulations and accounting data on dairy cost of production in two US regions to compare the crowding-out effect on representative producers in the upper and lower Midwest. We find that the magnitude of the crowding out depends on production efficiency, market risk exposure, and the timing of the Margin Protection Program sign-up.

Suggested Citation

  • Yang, Fanda & Bozic, Marin, 2015. "Will the Margin Protection Program for Dairy Producers Crowd Out Dairy Futures and Options?," 2015 Conference, April 20-21, 2015, St. Louis, Missouri 285836, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:n13415:285836
    DOI: 10.22004/ag.econ.285836
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