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Producer-Level Hedging Effectiveness of Class III Milk Futures

Author

Listed:
  • Altman, Ira J.
  • Sanders, Dwight
  • Schneider, Jonathan

Abstract

Mailbox milk prices from a representative dairy operation in Illinois are used to gauge the farmlevel hedging effectiveness of Class III milk futures traded on the Chicago Mercantile Exchange. Predominantly used by manufacturers and end users to price cheese, the Class III milk futures are not frequently utilized by producers. The presented analysis shows that the Class III milk futures do provide an effective producerlevel hedge : a hedge ratio of 0.85 can reduce price risk by over 90 percent. The importance of seasonal basis components for individual producers is highlighted.

Suggested Citation

  • 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.
    • Handle: RePEc:ags:jasfmr:189871
    DOI: 10.22004/ag.econ.189871
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    References listed on IDEAS

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    1. Sanders, Dwight R. & Manfredo, Mark R. & Greer, Tracy D., 2003. "Hedging Spot Corn: An Examination Of The Minneapolis Grain Exchange'S Cash Settled Corn Contract," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 21(1), pages 1-17.
    2. Wang, Dabin & Tomek, William G., 2005. "Characterizing Distributions of Class III Milk Prices: Implications for Risk Management," 2005 Annual meeting, July 24-27, Providence, RI 19322, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Wang, Dabin & Tomek, William G., 2005. "Characterizing Distributions of Class III Milk Prices: Implications for Risk Management," Working Papers 127085, Cornell University, Department of Applied Economics and Management.
    4. 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," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 15(2), pages 1-20.
    5. Bamba, Ibrahim & Maynard, Leigh J., 2004. "Hedging-Effectiveness of Milk Futures Using Value-At-Risk Procedures," 2004 Conference, April 19-20, 2004, St. Louis, Missouri 19028, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    6. Sanders, Dwight & Apgar, Gary & Manfredo, Mark R., 2005. "Using Farm-Level Data to Improve Marketing and Planning: An Illustration with Live Hogs," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2005, pages 1-8.
    7. Thraen, Cameron S., 2002. "A User'S Guide To Understanding Basis And Basis Behavior In Multiple Component Federal Order Milk Markets," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19063, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    8. Kastens, Terry L. & Jones, Rodney D. & Schroeder, Ted C., 1998. "Futures-Based Price Forecasts For Agricultural Producers And Businesses," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(1), pages 1-14, July.
    9. Hanson, Darin K. & Pederson, Glenn D. & Roe, Terry L & Gopinath, Munisamy, 1998. "Minnesota Agricultural Economist 691," Minnesota Applied Economist\Minnesota Agricultural Economist 13167, University of Minnesota, Department of Applied Economics.
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    Cited by:

    1. Nawazish Mirza & Krishna Reddy & Amir Hasnaoui & Peter Yates, 2020. "A Comparative Analysis of the Hedging Effectiveness of Farmgate Milk Prices for New Zealand and United States Dairy Farmers," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(1), pages 129-142, March.
    2. Białkowski, Jędrzej & Bohl, Martin T. & Perera, Devmali, 2023. "Commodity futures hedge ratios: A meta-analysis," Journal of Commodity Markets, Elsevier, vol. 30(C).
    3. repec:zbw:iamodp:340077 is not listed on IDEAS
    4. Prehn, Soren, 2024. "Why hedging, as practiced for storable commodities, is not an option for dairy farmers: a critical discussion," IAMO Discussion Papers 340077, Institute of Agricultural Development in Transition Economies (IAMO).
    5. Jędrzej Białkowski & Martin T. Bohl & Devmali Perera, 2022. "Commodity Futures Hedge Ratios: A Meta-Analysis," Working Papers in Economics 22/12, University of Canterbury, Department of Economics and Finance.

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    Agribusiness; Agricultural Finance;

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