Reallocation of Price Risk among Cooperative Members

The purpose of this paper is to explore the theoretical possibility of reallocation of price risk among members of processing cooperatives in the Danish hog and dairy sectors. Based on the observation that no effective price risk management institutions exist for Danish hog and dairy farmers, possible explanations for this are discussed and the possibility of cooperatives to reallocate risk among members is analyzed. Use of futures to hedge individual farmer price risk is absent, which may be due to prohibitively high basis risk. Farmers are exposed to the cooperative price. Endowing members with proportional forward contracts and organizing the exchange of these contracts via a double auction mechanism will reallocate risk, realizing gains depending on member heterogeneity and transaction costs. Most research on risk transfer focuses on vertical reallocations of risk in the value chain, whereas this paper explores the possibility of horizontal risk transfer.

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 Record created 2017-04-01, last modified 2018-01-23

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