Liquidity, hedging and the survival of North German dairy farms

Stephan Hoehl and Sebastian Hess

European Review of Agricultural Economics, 2022, vol. 49, issue 1, 208-236

Abstract: Increasingly, European dairy farmers have to manage the raw milk price risk. Price hedging for raw milk and an increasing number of individual fixed-price contracts with processors are now available. However, the choice of hedging a certain share of milk output still leaves individual farmers facing a complex decision. The cash flow model in this study explains the probability of a typical northern European dairy farm surviving illiquidity over an 18-month period under common milk price volatility. The probability of farm survival was modelled in relation to available liquidity buffers and different levels of farm-specific production costs. The model allowed minimum shares of milk output to be determined, for which a fixed price should be hedged if the objective is farm survival at a given probability. Using these modelling results, practitioners are able to determine this share graphically.

Keywords: liquidity; cash flow; dairy farms; risk management; bankruptcy; Ornstein–Uhlenbeck process (search for similar items in EconPapers)
Date: 2022
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