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Analysis Of Expected Price Dynamics Between Fluid Milk Futures Contracts And Cash Prices For Fluid Milk

Author

Listed:
  • Fortenbery, T. Randall
  • Cropp, Robert A.
  • Zapata, Hector O.

Abstract

The objective of this study is to provide an empirical evaluation of the expected relationship between cash and futures prices for fluid milk. This is done using historic cash prices from 1988 to 1995, and making inferences about how futures prices would have behaved if they had traded during this sample period. Futures prices are simulated over the sample period based on two assumptions about futures market behavior for fluid milk. The first is that the futures market will essentially price the Basic Formula Price (BFP). The BFP is an estimate of the previous month's pay price for Grade B manufacturing milk in Minnesota and Wisconsin adjusted for contemporaneous changes in the prices of manufactured milk products. It establishes the federal milk marketing order minimum Grade A pay price for Class III milk used to make cheese, and is the mover of both the minimum Class II price for milk used in soft manufacturing products and the minimum Class I price for beverage milk (Jesse).

Suggested Citation

  • Fortenbery, T. Randall & Cropp, Robert A. & Zapata, Hector O., 1997. "Analysis Of Expected Price Dynamics Between Fluid Milk Futures Contracts And Cash Prices For Fluid Milk," Staff Papers 12618, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    • Handle: RePEc:ags:wisagr:12618
    DOI: 10.22004/ag.econ.12618
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    File URL: https://ageconsearch.umn.edu/record/12618/files/stpap407.pdf
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    References listed on IDEAS

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    1. Granger, C. W. J. & Newbold, Paul, 1986. "Forecasting Economic Time Series," Elsevier Monographs, Elsevier, edition 2, number 9780122951831 edited by Shell, Karl.
    2. Bishop, Robert V., 1979. "The Construction and Use of Causality Tests," Journal of Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, vol. 31(4), pages 1-6, October.
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    Cited by:

    1. Song, Wenxing & Fortenbery, T. Randall, 2017. "Forecasting Hard Red Winter and Soft White Wheat Basis in Washington State," 2017 Conference, April 24-25, 2017, St. Louis, Missouri 285875, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    2. Bozic, Marin, 2011. "Three essays in commodity futures and options price performance," Faculty and Alumni Dissertations 160678, University of Minnesota, Department of Applied Economics.
    3. Bozic, Marin & Fortenbery, T. Randall, 2012. "Price Discovery, Volatility Spillovers and Adequacy of Speculation," 2012 Conference, April 16-17, 2012, St. Louis, Missouri 285784, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Jeffrey A Frankel & Andrew K Rose, 2010. "Determinants of Agricultural and Mineral Commodity Prices," RBA Annual Conference Volume (Discontinued), in: Renée Fry & Callum Jones & Christopher Kent (ed.),Inflation in an Era of Relative Price Shocks, Reserve Bank of Australia.
    5. Altman, Ira J. & Sanders, Dwight & Schneider, Jonathan, 2008. "Producer-Level Hedging Effectiveness of Class III Milk Futures," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2008, pages 1-8.
    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. Sanders, Dwight R. & Schneider, Jonathan & Altman, Ira J., 2007. "Producer-Level Hedging Effectiveness of Class III Milk Futures," 2007 Annual Meeting, February 4-7, 2007, Mobile, Alabama 34983, Southern Agricultural Economics Association.
    8. Newton, John & Thraen, Dr. Cameron, 2012. "Road Block to Risk Management - How Federal Milk Pricing Provisions Complicate Class 1 Cross-Hedging Incentives," 2012 Conference, April 16-17, 2012, St. Louis, Missouri 285768, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    9. Bozic, Marin & Fortenbery, T., 2015. "Price Discovery, Volatility Spillovers and Adequacy of Speculation when Spot Prices are Stationary: The Case of U.S. Dairy Markets," 2015 Conference, August 9-14, 2015, Milan, Italy 211369, International Association of Agricultural Economists.
    10. Wolf, Christopher A. & Berwald, Derek K., 1999. "The Potential Of Dairy Futures Contracts As Risk Management Tools," 1999 Annual meeting, August 8-11, Nashville, TN 21709, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Newton, John & Thraen, Cameron S., 2014. "Chewing the Cud on Using Multi-Commodity Hedge Ratios To Manage Dairy Farm Risk," 2014 Conference, April 21-22, 2014, St. Louis, Missouri 285819, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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