9.1.5 RECETAS ESTÁNDAR DE POSTRES: R S #

This thesis analyzed the use of market risk management strategies and tools for dairy farms through the use of simulation techniques. Pro-forma financial statements were constructed as a medium for this analysis. Simulations were designed to mimic the price environment faced by dairy managers from 2003 through 2008. Results indicate that variance in net farm income can be reduced through the use of risk management tools. Specific levels of hedging, which best fit any one operation, will depend on the preferences of the dairy manager and the characteristics of the

operation.

In sum, those strategies using cash marketing to price milk production had the highest variance in net farm income. The use of futures contracts provides the greatest reduction in net farm income variance but is accompanied by the highest total costs on average. While options based strategies do not reduce net farm income variance as greatly as futures contracts, they do provide comparable minimum net farm income protection while at the same allowing for higher upside potential of net farm income than is found in the results for strategies based on futures contracts. The use of options in averting market risk has lower total costs, which are also not as variable as the costs associated with futures contracts. However, strategies using options typically had lower returns. In general hedging only fifty percent of the milk production resulted in higher returns on investment as average costs decreased from the levels associated with full hedging by a greater amount than did the average reduction in net farm income standard deviation through the use of risk management tools.

This work provided a unique extension to the literature by explicitly

considering the full distributions of the costs and benefits of hedging. In addition, this work used a selective hedging strategy based upon the financial situation of the dairy

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farm. Areas for additional research include sensitivity analysis across several parameters such as price volatility, marketing triggers, and hedging ratios as well as comparison across various marketing philosophies including calendar based

approaches.

The use of risk management tools is not a costless activity and typically results in lower levels of net farm income in the long run. Therefore the decision maker may be better served to frame risk management as a means rather than an end. While reducing variance in net farm income has value, as discussed earlier in this work variability in net farm income is not inherently a risk (Shadbolt and Martin). Instead, it may behoove decision makers to think of risk management as a method to achieve some other goal, for instance a less variable income stream may increase the attractiveness of another capital investment or complement desired production strategies (Johnson and Boehlje). Market risk management tools can provide dairy managers with greater control over some of the price volatility they face with respect to milk and feed prices. The effects of the various risk management tool combinations examined in this work vary in the manner in which they provide this control as well as their associated costs. While the use of futures contracts provides greater variance reduction overall, the use of options allows for upside potential in net farm income. Along with this, while futures offer lower initial costs and thus a greater leverage effect than option, on average though futures contracts have higher costs with wider variances than do options. These characteristics should be strongly considered by dairy managers in choosing their preferred strategy for managing price risks.

While this work presents a unique structure for modeling the performance of various market risk management tools, it does allow for additional research opportunities. Although the action of the marketing strategy, to hedge when the

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desired income over purchased feed cost is generated within the simulation, represents a novel approach to modeling the strategic choices of a decision maker future work would complement the results of this work by simultaneously evaluating other marketing actions such as those based on time or the position of current prices relative to historic measures. Including these types of marketing actions would allow for comparisons against those strategies previously examined in the literature regarding risk management on dairy farms.

Perhaps one of the most important areas for further research relates to the psychological structures behind decisions based on incomplete information. The benefits of increased knowledge in this area are several fold but would especially benefit decision makers in improving their own decision making processes and would also allow for the development of more individually tailored risk management products. The simulation techniques and model structure used in this model are well tailored to elicitation of preferences as the model is structured in a whole farm manner. Thus a dairy manager can observe the effects of isolated variables on the entire operation while at the same being able to efficiently learn from the virtual experience provided through the simulation techniques.

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