Reallocation of price risk among members

Marketing of milk and meat in Denmark is dominated by two large cooperatives, Arla Foods in the dairy sector and Danish Crown in the pork sector. Members in these cooperatives practically have no possibility for price risk management on their main product. Futures markets for dairy and pork are not...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Author Pedersen, Michael Friis
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2012
Subjects
Futures market
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Summary:Marketing of milk and meat in Denmark is dominated by two large cooperatives, Arla Foods in the dairy sector and Danish Crown in the pork sector. Members in these cooperatives practically have no possibility for price risk management on their main product. Futures markets for dairy and pork are not utilised, and it is suggested that the reason is prohibitively large basis risk. The events following the global financial crisis suggest increased need for price risk management in Danish agriculture. Since futures markets do not seem to be a viable solution, the paper explores an alternative. Reallocation of price risk among members in marketing cooperatives. Endowing members with a forward contracted share of delivery, and allowing for transfer at a market price will lead to reallocation gains if member heterogeneity in cost of risk is great enough and transaction costs are low enough.