A Comparative Analysis of the Hedging Effectiveness of Farmgate Milk Prices for New Zealand and United States Dairy Farmers

Nawazish Mirza, Krishna Reddy (), Amir Hasnaoui () and Peter Yates ()
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Krishna Reddy: Toi Ohomai Institute of Technology
Amir Hasnaoui: Excelia Group
Peter Yates: University of Waikato

Journal of Quantitative Economics, 2020, vol. 18, issue 1, No 6, 129-142

Abstract: Abstract This study investigates the effectiveness of hedging and cross-hedging of fluid milk supplied by New Zealand farmers using derivatives offered by the NZX dairy futures market. The contribution of the paper is fourfold. Firstly, we have examined the use of other commodity futures to test the effectiveness of fluid milk hedging. Secondly, we have checked whether the other commodity futures provide lessons for the NZX dairy futures derivatives that are offered in New Zealand. Thirdly, we have compared the effectiveness of cross-hedging the farmgate milk price with the results 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. For this we have used robust econometric testing techniques to evaluate the hedging and cross-hedging analysis. 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.

Keywords: Correlation; Cross-hedging; Dairy; New Zealand Stock Exchange (NZX) dairy futures; Global Dairy Trade auctions (GDT) (search for similar items in EconPapers)
JEL-codes: G11 G14 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s40953-019-00172-0

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