Dairy Price Risk Management Analysis
Joshua Engelmann, Mayer, Minn., defended his thesis, “Dairy Price Risk Management Analysis,” on November 10, 2011. He is the Owner of Woodland Dairy Inc. in Waverly, Minn. He will graduate from Kansas State University in May with a Master’s in Agribusiness (MAB).
The Engelmann family dairy operation increased from 300 milk cows to 1,700 milk cows in 2003. Before the expansion, their cropping operation provided additional income for the farm. After the expansion, the cropping side became more devoted to feeding the livestock, which left their dairy income less diversified and more dependent on increasingly volatile milk prices.
“We are now 90-95% dependent on milk price, which leaves us vulnerable to price fluctuations,” Engelmann said. “I wanted to study different risk management tools and strategies to develop a risk management plan for our milk sales.”
Engelmann analyzed a variety of risk management strategies using forward contracts, futures, put options and cash at different time periods and minimum price levels utilizing the last 10 years of price data.
Based on the historical data he analyzed, risk management strategies can be used to decrease the amount of price risk faced by a dairy operation, but whatever plan is selected needs to be constantly monitored and adjusted as necessary.
Kevin Dhuyvetter, Professor of Agricultural Economics and Engelmann’s thesis advisor, said, “Josh’s thesis is a perfect example of what MAB research projects are about. Josh identified a real-world issue impacting their business and he used the economic theory and tools from his classes to define and analyze a researchable question related to the milk market. The answer to that question will provide him with sound information for future risk management decisions on their farm."
The full thesis publication can be found online on K-State’s Research Exchange at http://hdl.handle.net/2097/13209.