Price Risk Management Strategies for Virginia Dairy Producers

The 1996 and 2002 Farm Bill changes in milk support price legislationderegulated the market and milk prices are more volatile than ever. The use of amechanism to reduce farmers' exposure to volatile milk prices has therefore becomeessential. This study evaluates the impact of two hedging strategies, one conservative andthe other an intermediate one (more sophisticated). Optimal parameters for the twostrategies are searched over a period of 5 years. Then, the performance, in terms ofincreased profitability and reduced variation, is assessed and the best performer is chosenand applied to an out-of-sample dataset.With the in-sample data, both strategies generate higher mean monthly profits thanwith the no-hedging option. Comparison of both strategies indicates that the intermediatestrategy outperforms the conservative one in terms of higher profitability and lowervariance. Out-of-sample results confirm the findings of the in-sample results. Theadditional profits and the reduction in volatility can make the difference between keepinga farm profitable and bankruptcy.