Analysis of Price Risk Management Strategies in Dairy Farming Using Whole-Farm Simulations
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Combinations of futures and options contracts on milk and feed were simulated to determine
their influence on a representative dairy farm’s ability to meet cash flow requirements and
reduce the variance of net income. Compared with the reference scenario of selling milk and
procuring inputs on a monthly cash basis, the risk management activities did not result in
a significant change in either the level or variance of net farm income. The results suggest that
on average the current marketing procedure of monthly cash milk pricing and monthly feed
purchases (and pricing) produces a strong built-in natural hedge for dairy farmers.