Role in Managing
Prices for milk and dairy products have become increasingly unstable as
the Government support safety net has been lowered. Dairy coopera-
tives’ traditional pricing system is delineated and their role in the new
market environment is discussed. Some of the risks involved in using
emerging hedging mechanisms such as futures, options, and forward
contracting for managing price risks are assessed. The traditional pric-
ing system in regard to managing price risks is evaluated. Guidelines for
developing a cooperative’s hedging strategy are suggested.
Key words: Cooperatives, dairy, pricing, hedging, futures, options, for-
Dairy Cooperatives’ Role in Managing Price Risks
K. Charles Ling and Carolyn Betts Liebrand
Rural Business-Cooperative Service
RBS Research Report 152
Price: $5 domestic; $5.50 foreign
The efforts by the Federal Government to reduce milk-producing capaci-
ty by lowering the price support safety net since the mid-1980s resulted
in wide and uncharacteristic milk price fluctuations beginning in 1988.
The drastic price changes since 1989-90 have served as a wakeup call
to the dairy industry that price volatility has become a fact of life as the
industry moves toward a market-oriented dairy economy.
Dairy cooperatives have adapted to the situation and hedged the price
risks by diversifying into multi-product and multi-plant operations, expe-
diting inventory turnover, integrating and diversifying into consumer-
product and niche markets, forming marketing agencies in common to
share market information or coordinate dairy product marketing, and
entering joint ventures with other firms to shift away some of the risks.
New dairy price hedging mechanisms have been introduced by com-
modity exchanges. The Coffee, Sugar and Cocoa Exchange, New York,
began trading Cheddar cheese and nonfat dry milk futures contracts