eCommons

 

Characterizing Distributions of Class III Milk Prices: Implications for Risk Management

Other Titles

Abstract

Descriptive statistics and time-series econometric models are used to characterize the behavior of monthly fluid milk prices. Prices in April, May and June appear to be more variable than those in subsequent months, and the spring-time prices are perhaps skewed. Econometric models can capture the historical behavior of spot prices, but forecasts converge to the marginal distribution of the sample prices in about six months. Futures prices for Class III milk have the expected time-to-maturity effect and converge to the respective monthly distributions of the cash prices at contract maturity (as they must, since the contracts are cash settled). Thus, econometric models and futures quotes provide similar information about price behavior at contract maturity. Routine hedges in futures, especially those made four or more months prior to maturity, reduce the variance of returns, but over a period of years, lock-in an average return. While econometric models and futures quotes provide imprecise forecasts, they can be used in conjunction with historical data to determine whether expected prices are high relative to past experience. This may assist with making decisions about selective hedging. Likewise, historical evidence may be useful in evaluating expected returns from the use of put options. Results from simple hedging strategies using either futures or puts are illustrated, but more work is needed to evaluate optimal portfolios for dairy farmers.

Journal / Series

Volume & Issue

Description

WP 2005-17 July 2005

Sponsorship

Date Issued

2005-07-01

Publisher

Charles H. Dyson School of Applied Economics and Management, Cornell University

Keywords

hedging; marketing strategies; milk futures; milk prices; risk management

Location

Effective Date

Expiration Date

Sector

Employer

Union

Union Local

NAICS

Number of Workers

Committee Chair

Committee Co-Chair

Committee Member

Degree Discipline

Degree Name

Degree Level

Related Version

Related DOI

Related To

Related Part

Based on Related Item

Has Other Format(s)

Part of Related Item

Related To

Related Publication(s)

Link(s) to Related Publication(s)

References

Link(s) to Reference(s)

Previously Published As

Government Document

ISBN

ISMN

ISSN

Other Identifiers

Rights

Rights URI

Types

article

Accessibility Feature

Accessibility Hazard

Accessibility Summary

Link(s) to Catalog Record