Analysis of Forward Contracting by California Dairy Producers on Input and Output Sides using a Least Cost and Profit-Maximization Methods
Joel Karlin, Fresno, Cal., defended his thesis, “Analysis of Forward Contracting by California Dairy Producers on Input and Output Sides using a Least Cost and Profit-Maximization Methods,” Friday, April 9, 2010. Karlin is a Commodity Merchandiser/Market Analyst with Western Milling in Goshen, Cal. He graduated from Kansas State University in May with a Master’s in Agribusiness (MAB).
Dairy producers face a variety of management risks including volatile prices, rising input costs, and declining federal support. There are a number of tools that producers have at their disposal to help manage these price fluctuations including cash forward contracts and exchange traded options and futures for both the feed input and the milk output risks. Karlin’s main objective was to compare the net returns of price risk management tools available to dairy producers using least cost and profit maximization optimization models to determine which methods offer better net returns.
“I compared estimated returns of a number of California dairy producers who employ various risk management strategies, rather than only buy feed and sell milk on the spot markets to determine if one method generated a greater net return,” Karlin said.
His found net returns were higher for strategies that used spot milk prices. When selecting a strategy for obtaining feed, it is beneficial to forward contract those feed ingredients that have exhibited a large amount of price variability in the past.
Jeff Williams, Professor of Agricultural Economics and Karlin’s thesis advisor, said, “Joel studied risk management alternatives for milk producers. His work leads to better knowledge about price risk management in the dairy industry and serves as the foundation for additional research.”
K-State’s Master of Agribusiness is an award-winning, distance-education degree program that focuses on food and agribusiness management. Students and alumni work in every sector of the food and agribusiness sector and are located in more than 35 states within the United States and in 25 countries.
“Kansas State’s Master of Agribusiness program furnished me with the knowledge and tools to work in the agricultural industry. My thesis may offer a template to today’s dairy producers on how to maintain profitability against a backdrop of volatile feed and milk prices,” Karlin said.
The full thesis publication can be found online on K-State’s Research Exchange at http://hdl.handle.net/2097/3904.