Volatility in dairy

Participants in dairy commodity market are inevitably exposed to price risk, whether it is on the input side caused by increasing feed or energy costs or on the demand side by changing customer preferences or variations in global import and export flows. A buyer of dairy products has to secure the supply but certainly not at all cost, while on the other end a producer or coop is exposed to a global dairy market in which sudden price changes are accelerated through the chain. This creates both an opportunity and a challenge for trading companies to help clients and suppliers in the dairy market to mitigate these price risks.

Before considering solutions that may help, the single measure of uncertainly, typically referred to as underlying volatility of an asset, is an interesting phenomenon by itself. Understanding what drives volatility and decomposing timeseries in its underlying statistical properties may help you to quantify your risk levels accordingly. For example, understanding how certain components of milk products correlate with local milk prices during a season may provide an incentive to hedge part of your output at certain moments in the year. Interfood can propose a wide range of price risk management tools that can help you to stay within your agreed exposure levels or even allow you to participate on potential upside.

Risk remains an inherent part of doing business and it has to be monitored carefully against the risk appetite of the firm. The use of multiple risk metrics including a good understanding of market dynamics is paramount. Interfood performed a study on price volatility in the EU dairy market and used this information to dynamically hedge their price expose. Feel free to learn from it and send us a note on how we can help you!