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Why hedging, as practiced for storable commodities, is not an option for dairy farmers: a critical discussion

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  • Prehn, Soren

Abstract

It is common practice in the literature to apply the same hedging practices (i.e., full hedging and minimum variance hedging) to storable and non-storable commodities. But is this approach also suitable for fluid milk? Dairy farmers have very different hedging objectives than grain farmers. The former want to lock in profitable forward prices for fluid milk, while the latter are looking for profitable storage margins for grain. In this paper, we will discuss not only why standard hedging practices are inappropriate when the goal is to lock in a forward price for fluid milk but also which hedging practice should be used instead.

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  • 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).
    • Handle: RePEc:ags:iamodp:340077
    DOI: 10.22004/ag.econ.340077
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    1. Leland L. Johnson, 1960. "The Theory of Hedging and Speculation in Commodity Futures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 27(3), pages 139-151.
    2. 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.
    3. 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.
    4. Gray, Roger W. & Rutledge, David J.S., 1971. "The Economics of Commodity Futures Markets: A Survey," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 39(04), pages 1-52, December.
    5. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
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