Study on risk management in EU agriculture : case study 4 : multiannual price risk management

Price risk management is a crucial issue for farmers and for the supply chain operating under competitive market conditions. The lack of visibility on the future of markets induces short-term production decisions and sub-optimal long-term investment behaviour, with adverse consequences on agricultural competitiveness. Incomplete futures markets for agricultural product is considered to be a market failure that may need to be addressed through public policy interventions. Within the EU, liquid futures markets exist for only some grains and oilseeds. Market participants have developed numerous derived OTC contracts for these sectors that allow quite efficiently the management of intra-year price risk. When liquid futures markets are limited or when they do not exist, which is the case for livestock and dairy production, the chain actors are limited to spot markets with very limited capacity to manage price risk. Short term market risk is partially captured by periodic deliveries (milk or pigs) but risk is also imbedded in input cost volatility (feed costs). That is why actors within the food chain search for long-term price agreements to manage the first bandwidth of price or gross margin variation. Market risk management is first a private issue. Adequate equity level with respect to economic risks, prevention measures, diversification practices and risk transfer to service providers, such as insurers or financial intermediaries (credit and OTC contracts), are basic instruments and methods. Risk management within the food chain is another approach. Vertical integration has some benefits but is limited in the food sector as business activities became increasingly specialized and therefore segmented. After quite a long experience of integrated quality management, some companies are developing an "integrated price risk management".