What is it about?
We have used of other commodity futures to test the effectiveness of fluid milk hedging. We have checked whether the other commodity futures provide lessons for the NZX dairy futures derivatives that are offered in New Zealand. Wehave compared the effectiveness of cross-hedging the farmgate milk price with the 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.
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Why is it important?
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.
Perspectives
The effect of the constant policy changes causes the milk prices to become more unpredictable resulting in its volatility which makes hedging techniques increasingly hard to get it right for both producers and processors.
Dr Krishna Reddy
Toi Ohomai Institute of Technology
Read the Original
This page is a summary of: A Comparative Analysis of the Hedging Effectiveness of Farmgate Milk Prices for New Zealand and United States Dairy Farmers, Journal of Quantitative Economics, June 2019, Springer Science + Business Media,
DOI: 10.1007/s40953-019-00172-0.
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