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A Comparative Analysis of the Hedging Effectiveness of Farmgate Milk Prices for New Zealand and United States Dairy Farmers

Author

Listed:
  • Nawazish Mirza

    (Excelia Group)

  • Krishna Reddy

    (Toi Ohomai Institute of Technology)

  • Amir Hasnaoui

    (Excelia Group)

  • Peter Yates

    (University of Waikato)

Abstract

This study investigates the effectiveness of hedging and cross-hedging of fluid milk supplied by New Zealand farmers using derivatives offered by the NZX dairy futures market. The contribution of the paper is fourfold. Firstly, we have examined the use of other commodity futures to test the effectiveness of fluid milk hedging. Secondly, we have checked whether the other commodity futures provide lessons for the NZX dairy futures derivatives that are offered in New Zealand. Thirdly, we have compared the effectiveness of cross-hedging the farmgate milk price with the results reported in prior studies regarding hedging the farmgate milk price in the United States, while focusing on market factors that affect the effectiveness of the cross-hedge. For this we have used robust econometric testing techniques to evaluate the hedging and cross-hedging analysis. Our results show that the NZX dairy futures market suffers from illiquidity and displays relatively low correlation for cross-hedging purposes to the farmgate milk price. This implies that farmers either suffer from high volatility in their farmgate milk price or high basis risk in their cross-hedging. Our findings suggest that there is a need for a better price risk management tool for New Zealand dairy farmers.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:jqecon:v:18:y:2020:i:1:d:10.1007_s40953-019-00172-0
    DOI: 10.1007/s40953-019-00172-0
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    References listed on IDEAS

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    1. Zylstra, Michael J. & Kilmer, Richard L. & Uryasev, Stanislav, 2004. "Hedging Class I Milk: The "Acceleration" And "Mover" Effect," 2004 Annual meeting, August 1-4, Denver, CO 20109, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Lee, Sang-Won & Hansen, Bruce E., 1994. "Asymptotic Theory for the Garch(1,1) Quasi-Maximum Likelihood Estimator," Econometric Theory, Cambridge University Press, vol. 10(1), pages 29-52, March.
    3. Bozic, Marin & Fortenbery, T. Randall, 2010. "Analyzing Relationships Between Cash and Futures Dairy Markets Using Partially Overlapping Time Series," 2010 Annual Meeting, February 6-9, 2010, Orlando, Florida 56545, Southern Agricultural Economics Association.
    4. 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.
    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. Brorsen, B. Wade & Fofana, N'Zue F., 2001. "Success And Failure Of Agricultural Futures Contracts," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 19(2), pages 1-17.
    7. John Newton & Cameron S. Thraen, 2013. "Road Block to Risk Management — Investigating Class I Milk Cross-Hedging Opportunities," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 35(3), pages 550-564.
    8. John Newton & Cameron S. Thraen, 2013. "Road Block to Risk Management — Investigating Class I Milk Cross-Hedging Opportunities," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 35(3), pages 550-564.
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    Cited by:

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    3. Sha, Zhiping, 2022. "Total natural resources, oil prices, and sustainable economic performance: Evidence from global data," Resources Policy, Elsevier, vol. 79(C).
    4. Fernandez-Perez, Adrian & Frijns, Bart & Gafiatullina, Ilnara & Tourani-Rad, Alireza, 2022. "Profit margin hedging in the New Zealand dairy farming industry," Journal of Commodity Markets, Elsevier, vol. 26(C).
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    More about this item

    Keywords

    Correlation; Cross-hedging; Dairy; New Zealand Stock Exchange (NZX) dairy futures; Global Dairy Trade auctions (GDT);
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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