Swedish dairy farmers’ interest in using price risk management tools : a study of correlating factors

Sammanfattning: The dairy market will change importantly in the coming years. The quota system, which has regulated the European dairy production, will disappear in 2015 and the European dairy market will then be importantly affected by the volatility characterizing the dynamic of world prices. Besides this, the global demand of dairy products is expected to increase due to the growing world population. Farmers in countries such as the U.S. and New Zealand, when compared to Swedish farmers, show greater familiarity and experience with risk management tools. This is due to having been using for years derivatives in order to minimise price volatility. Derivatives are decreasing the risk of being affected by volatile prices and can serve as an insurance against relevant price drops. In this study, we use a quantitative questionnaire in order to analyse the factors which may qualify the Swedish farmers’ interest toward the use financial derivatives. The factors were divided into subgroups - farm characteristics such as milking system, farmer characteristics such as age and environmental factors such as the type of dairy processor they deliver to. A probit analysis is then proposed to determine if and to which extent these factors have been driving the farmer’s interest in the use of derivatives. The results in this study showed that 34 % of the farmers wanted to use derivatives, either through a dairy cooperative (13 %), a bank (2 %) or both (19 %). The probit analysis showed that farmers, who were concerned about the milk price and wanted to often be updated about milk price, did not want to use derivatives. In contrast farmers who managed a company with favourable results and did not think derivatives were difficult to learn wanted to use derivatives. Derivatives are in reality best suited for farmers not willing to bear risk and would like to reduce price volatility. These results could be due to low experience and knowledge about how derivatives work. We conclude by stressing that in order to make dairy companies financially sustainable in the long term, knowledge about the functioning and purpose of derivatives is needed.