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Case study
Publication date: 20 January 2017

Karl Schmedders, Patrick Johnston and Charlotte Snyder

The financial success of dairy farms depends critically on the price of their main output, milk. Large volatility in the price of milk poses a considerable business risk to dairy

Abstract

The financial success of dairy farms depends critically on the price of their main output, milk. Large volatility in the price of milk poses a considerable business risk to dairy farms. This is particularly true for family-run dairy farms. The question then arises: how can a farm owner hedge the milk price risk? The standard approach to establish a price floor for a commodity such as milk is to purchase put options on commodity futures. At the Chicago Mercantile Exchange, farmers can buy put options on the price of a variety of milk products. However, the price a farm receives for its milk depends on many factors and is unique to the farm. Thus, a farmer cannot directly buy put options on the price he receives for the milk his farm produces. Instead the farmer needs to determine which of the options available for trade at the Chicago Mercantile Exchange offer the best hedge for his own milk price. The assignment in this case is to examine historical data on several prices of milk products and the milk price received by a family-run dairy farm in California. Students need to find the price that is most closely correlated to the farm's milk price and to then choose options with the appropriate strike price that serve as the best hedge for the farm's price risk.

The objective is to expose students to an interesting but simple finance application of linear regression analysis. To solve the case, students must run several simple linear regressions, then use the best regression model they find to make a prediction for the dependent price variable and analyze the prediction interval in order to achieve the desired objective outlined in the case. By completing the case, students will acquire a good understanding of their regression model and its usefulness.

Details

Kellogg School of Management Cases, vol. no.
Type: Case Study
ISSN: 2474-6568
Published by: Kellogg School of Management

Keywords

Article
Publication date: 1 March 2013

Song Shi and Iona McCarthy

The purpose of this paper is to investigate the relationship between dairy farmland prices and farmland rental incomes in New Zealand from 1982 to 2009.

Abstract

Purpose

The purpose of this paper is to investigate the relationship between dairy farmland prices and farmland rental incomes in New Zealand from 1982 to 2009.

Design/methodology/approach

Using the net cash income received under a 50/50 share‐milking agreement to proxy the net cash rent, the paper attempts to explore the prices and rental incomes relationship using the present value model and then apply them in a pool regression model to show how farmers formulate their price bids.

Findings

Results show that over the long‐term dairy farmland price growth tends to be in line with rental growth. However, there is substantially higher growth in land prices in relation to the rental growth since 2002. Moreover, the risk premium placed by farmland owners on future rental cash flows since 2002 appears substantially below the historical average. The research further shows that farmers nowadays place more emphasis on the current season's payout than historical incomes in their price bids.

Practical implications

As a consequence the recent high land prices will be extremely sensitive to a permanent change to the low interest rate environment and future growth of dairy income. A policy recommendation is also highlighted.

Originality/value

The results of this paper indicates that the rapid price appreciation for New Zealand dairy farmland since 2000s might give rise to bubbles.

Details

Journal of Property Investment & Finance, vol. 31 no. 2
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 7 December 2015

Dennis Bergmann, Declan O’Connor and Andreas Thümmel

The purpose of this paper is to analyze how the German, Irish and average EU farm gate milk prices have changed after the common agricultural policy (CAP) reform in 2003. In…

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Abstract

Purpose

The purpose of this paper is to analyze how the German, Irish and average EU farm gate milk prices have changed after the common agricultural policy (CAP) reform in 2003. In addition the dynamics of these prices are compared to a US farm gate price.

Design/methodology/approach

These milk price time series are divided into two time periods, pre and post the CAP 2003 reform, and decomposed into their trend, seasonal and cyclical components. For the decomposition a state space model is used following the approach of Harvey (1989).

Findings

The results show that the dynamics of the EU, German and Irish series converged after the CAP 2003 reform were implemented and that a three-year cycle is underlying the European milk prices which is comparable with the cycle length of the US milk price. In addition it is shown that most of the observed price variation in recent times is attributed to the cyclical component.

Research limitations/implications

The division of the milk price time series into periods pre and post the CAP 2003 reform is somewhat subjective because not all measures were immediately applied after the reform. It is also possible that other factors may have contributed to the changed dynamics which have been observed. In addition this leads to a short data sample.

Practical implications

The results show that policy makers should consider counter cyclical policy measures given the importance of the cyclical component. Also most models used to evaluate policies do not account for cycles which may lead to wrong conclusions. In addition farmer should be aware of the cyclical nature of milk prices as they budget and plan for the future.

Originality/value

No previous decomposition studies of European milk prices exist.

Details

British Food Journal, vol. 117 no. 12
Type: Research Article
ISSN: 0007-070X

Keywords

Book part
Publication date: 30 June 2017

Bruce Muirhead

The chapter will document the Canadian reaction, as reflected in the demand of New Zealand, that Canada fundamentally alters its dairy supply management system in order to…

Abstract

The chapter will document the Canadian reaction, as reflected in the demand of New Zealand, that Canada fundamentally alters its dairy supply management system in order to participate in the Trans-Pacific Partnership negotiations. The Canadian government has resolutely refused to do so, supported wholeheartedly by dairy farmers throughout the country. This is in part because of the effect such an action would have on rural spaces and the debilitating result it would have on Canadian dairy production. As well, the chapter will address the issue of the cost of dairy products in New Zealand as compared with Canada. Part of this analysis will focus on the role of supermarkets in determining the price structure of milk in both Canada and New Zealand. Finally, the chapter will offer an examination of the New Zealand system as represented by Fonterra and the Canadian system as epitomized by dairy supply management.

Article
Publication date: 3 July 2017

Richard Nehring, Richard Barton and Charles Hallahan

The purpose of this paper is to examine the rise in crossbred cow numbers in the US dairy herd. Methods used look at well managed herds to see if crossbreeding provides a…

Abstract

Purpose

The purpose of this paper is to examine the rise in crossbred cow numbers in the US dairy herd. Methods used look at well managed herds to see if crossbreeding provides a management tool that producers are using to maintain profitability.

Design/methodology/approach

The authors estimate a Translog stochastic production frontier (SPF) for US dairy farms to examine the competitiveness of crossbred and non-crossbred dairy herds by system and region.

Findings

The bottom-line conclusion is that WM or highly efficient crossbred herds solidly compete on a financial basis with larger WM Western Holstein herds, the most technically efficient managed group, based on the SPF results in the authors’ study. The study finds that net return on assets for crossbred herds are not different from Western Holstein herds and that there is no significant difference in amount of milk per cow produced annually.

Research limitations/implications

Because of a need to unmask the advantages of crossbreeding as a technology it was necessary to separate WM herds from poorly managed herds. That was done by frontier estimates that robustly ranked operation and corrected for endogeneity, tested for selectivity bias, and incorporated the NASS survey design.

Originality/value

For the first time, the 2010 Dairy Cost and Returns questionnaire version of the Agricultural Resource Management Survey (Dairy CAR) design allows researchers to expand survey observations to represent the vast majority of the US dairy farm population and to sort dairy farms into crossbred/non-crossbred herds.

Details

Agricultural Finance Review, vol. 77 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

Open Access
Article
Publication date: 28 April 2020

Jakub Olipra

Professionals from the dairy sector commonly believe that the results of Global Dairy Trade (GDT) auctions are a good leading indicator for prices of dairy commodities. The…

Abstract

Purpose

Professionals from the dairy sector commonly believe that the results of Global Dairy Trade (GDT) auctions are a good leading indicator for prices of dairy commodities. The purpose of this paper is to test that hypothesis for prices of key dairy commodities (skimmed milk powder (SMP), whole milk powder (WMP), butter and cheddar) in the main dairy markets (the US, EU and Oceania).

Design/methodology/approach

The leading properties of the GDT auctions are investigated using vector error correction models (VECM).

Findings

The results show that prices at GDT auctions may be treated as a benchmark for global prices of WMP and SMP as they affect prices in all considered markets. However, in case of EU market the relationship with the GDT is bidirectional. GDT prices reveal some leading properties also in cheddar market, however price relationships in this market are much more complex. In case of butter market, GDT can be regarded as a benchmark only for Oceania.

Practical implications

The results of this paper improve knowledge on price transmission in dairy markets, show the role of the GDT auctions in the price setting process, and thus may help professionals from the dairy sector to formulate their price expectations more precisely.

Originality/value

Despite the fact that many professionals from the dairy sector treat GDT auctions as a benchmark, so far their leading properties have not been scientifically proven.

Details

British Food Journal, vol. 122 no. 7
Type: Research Article
ISSN: 0007-070X

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Article
Publication date: 19 April 2022

Anthony N. Rezitis and Ourania A. Tremma

The study's purpose is to investigate the price volatility of four dairy commodities (skim milk powder [SMP], whole milk powder [WMP], butter and cheddar cheese) in the three most…

Abstract

Purpose

The study's purpose is to investigate the price volatility of four dairy commodities (skim milk powder [SMP], whole milk powder [WMP], butter and cheddar cheese) in the three most significant regional markets (EU, Oceania and US) in the international dairy market.

Design/methodology/approach

The study uses a panel-Generalized Autoregressive Conditional Heteroskedastic (panel-GARCH) modeling technique and data from January 12, 2001, to April 28, 2017.

Findings

Conditional volatility was higher during subperiods 2007–2010 and 2014–2016 when conditional cross-correlations between prices had the lowest values. In some cases, they were negative (i.e. between the EU and the USA and between Oceania and the USA for both butter and cheese). Interdependence across the three dairy markets, especially for SMP and WMP markets and for the butter market between EU and Oceania is also strongly evidenced. Interdependence is responsible for the spillover of price shocks across the three regions.

Research limitations/implications

The data set used should be extended to cover the COVID-19 pandemic period.

Originality/value

This is the first study to use panel-GARCH to examine international dairy prices and volatility linkages, where previous studies mainly used multivariate GARCH models. Panel-GARCH allows a high-dimensional data series (i.e. 12 dairy prices) and generates potential efficiency gains in estimating conditional variances and covariances by incorporating information about heterogeneity across markets and considering their interdependence.

Details

Journal of Agribusiness in Developing and Emerging Economies, vol. 13 no. 5
Type: Research Article
ISSN: 2044-0839

Keywords

Article
Publication date: 25 July 2022

Mario Ortez, Nicole Olynk Widmar, Mindy Lyn Mallory, Christopher Allen Wolf and Courtney Bir

This article quantifies public sentiment for dairy products using online media and investigates potential relationships between online media, both volume and sentiment, and future…

Abstract

Purpose

This article quantifies public sentiment for dairy products using online media and investigates potential relationships between online media, both volume and sentiment, and future prices of Class III milk.

Design/methodology/approach

Netbase, an online media listening platform, was used to quantify US generated online media sentiment and number of mentions regarding dairy products. Granger-causality tests and Impulse Response Functions (IRFs) were used to study relationships between online media derived data and dairy futures prices.

Findings

Milk and cheese have more mentions in online media than yogurt and ice cream. Online media net sentiment around milk was the lowest of the dairy products studied. Granger-causality tests showed that Class III milk price Granger-causes net sentiment of dairy as a whole and of fluid milk. Price additionally Granger-causes mentions of milk, ice cream and yogurt. Notably, milk and ice cream mentions Granger-cause the Class III milk price. IRF's reveals that increases in mentions have a positive, albeit small, effect on the Class III milk price that is statistically significant for ice cream, but not for milk. IRF's directionality of the relationship from price to online media derived data was mixed.

Originality/value

This is the first time that relationships between online media -volume and sentiment- and futures prices of an agricultural commodity are researched. Exploration of futures markets alongside online media advances the use of online media to glean insights in financial, along with food and agricultural markets.

Details

Agricultural Finance Review, vol. 83 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

Article
Publication date: 26 February 2018

Hinrich Schulte and Oliver Musshoff

The expected increase in milk price volatility after the milk quota abolition in the EU will lead to further planning uncertainty on dairy farms. Consequently, the modest supply…

Abstract

Purpose

The expected increase in milk price volatility after the milk quota abolition in the EU will lead to further planning uncertainty on dairy farms. Consequently, the modest supply of insurance and the hedging of milk prices through futures may increase. To shed more light on this possibility, the purpose of this paper is to calculate the additional willingness to pay (WTP) for risk-averse dairy farmers in order to cope with milk price volatility after the quota abolition.

Design/methodology/approach

After the European dairy quota abolition, European dairy farmers will be more dependent on the milk price of the world market. To reflect the world market, a time series of milk prices of a dairy processor from New Zealand (NZ) was used because NZ is exporting most of their dairy products under world market conditions. Based on the NZ price series, we approximated milk price volatility after the European dairy quota abolition and calculated the additional WTP of risk-averse dairy farmers in order to cope with milk price volatility.

Findings

Using a price series of NZ to approximate milk price volatility after the European dairy quota abolition and comparing it with a German milk price series before quota, the results suggest there might be increased WTP after the milk quota abolition in order to cope with milk price volatility. Following this assumption, the WTP of considerable risk-averse dairy farmers may exceed the initial transaction costs of hedging milk prices with futures on commodity exchanges. Nevertheless, a qualitative discussion of the results shows costs of education, basis risk, and the small size of farms could still keep dairy farmers from hedging the milk price.

Originality/value

In calculating the additional WTP for risk-averse dairy farmers to cope with milk price volatility, this is the first study to attempt to illustrate the expected influence of increasing milk price volatility at the dairy farm level after the dairy quota abolition in the EU. The additional WTP gives further insights into the need for and acceptance of insurance after the dairy quota abolition at the dairy farm level.

Details

Agricultural Finance Review, vol. 78 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

Abstract

Details

Panel Data Econometrics Theoretical Contributions and Empirical Applications
Type: Book
ISBN: 978-1-84950-836-0

1 – 10 of over 2000