Liquidity, hedging and the survival of North German dairy farms. (16th February 2021)

• Record Type: Journal Article
• Authors: Hoehl, Stephan; Hess, Sebastian
• Is Part Of: European review of agricultural economics. Volume 49:Number 1(2022)
• Page Start: 208
• Page End: 236
• Publication Date: 2021-02-16
• Subjects: liquidity -- cash flow -- dairy farms -- risk management -- bankruptcy -- Ornstein–Uhlenbeck process; Agriculture -- Economic aspects -- Periodicals; Agriculture -- Economic aspects -- Europe -- Periodicals; 338.109405
• DOI: 10.1093/erae/jbab009
• Languages: English
• ISSNs: 0165-1587

Abstract

Abstract: Increasingly, European dairy farmers have to manage the raw milk price risk. Price hedging for raw milk and an increasing number of individual fixed-price contracts with processors are now available. However, the choice of hedging a certain share of milk output still leaves individual farmers facing a complex decision. The cash flow model in this study explains the probability of a typical northern European dairy farm surviving illiquidity over an 18-month period under common milk price volatility. The probability of farm survival was modelled in relation to available liquidity buffers and different levels of farm-specific production costs. The model allowed minimum shares of milk output to be determined, for which a fixed price should be hedged if the objective is farm survival at a given probability. Using these modelling results, practitioners are able to determine this share graphically.