RISK BALANCING STRATEGIES IN THE FLORIDA DAIRY INDUSTRY: AN APPLICATION OF CONDITIONAL VALUE AT RISK

Michael J. Zylstra, Richard L. Kilmer and Stanislav Uryasev

No 22021, 2003 Annual meeting, July 27-30, Montreal, Canada from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: Legislation has prompted changes in milk price volatility. Milk price volatility impacts the producer's exposure to business risk which is compound by the firms financial risk. Financial risk is a function of the firms capital structure. In the short run it is difficult for the producer to significantly change the firms capital structure and therefore balance increased business risk with reduced financial risk. The producer can however reduce financial and business risk by using futures contracts to lock in a price for milk produced. The producer's risk preferences dictate the producer's hedge ratio. Using the return on equity as a profitability measure and the conditional value at risk as a risk measure the optimal hedge ratio is derived for various probabilities of negative returns on equity.

Keywords: Agricultural and Food Policy; Livestock Production/Industries; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 25
Date: 2003
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea03:22021

DOI: 10.22004/ag.econ.22021

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