Road Block to Risk Management — Investigating Class I Milk Cross-Hedging Opportunities

John Newton and Cameron S. Thraen

Applied Economic Perspectives and Policy, 2013, vol. 35, issue 3, 550-564

Abstract: This study examines the risk management opportunities for fluid milk market participants in the United States through the use of milk futures contracts. We estimate the nature of basis risk from 2002–2011 using modern time-series and econometric techniques. The results of this investigation reveal that at sufficient hedging intervals, using class III manufacturing milk futures contracts to cross-hedge fluid milk has the ability to reduce risk and provide revenue stability to market participants. When used in conjunction with milk futures, prediction algorithms for the closing basis facilitate more direct management of fluid milk price risk.

Date: 2013
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