PR - Reallocation Of Price Risk Among Cooperartive Members

Currently there is practically no active output price hedging in the Danish livestock sector. This may be because their, until recently, was very little need for hedging, as Danish farmer had (a perception of) very large credit reserves up to the GFC. After the GFC the need for price risk management has increased, as an institutional vacuum has emerged, where no new risk coping mechanisms are in place after the credit reserves disappeared. Price hedging via futures may problematic when physical delivery is to a cooperative, as the cooperative specific business risk which is carried by the members, will translate into basis risk in a futures hedging arrangement. This paper explores the possibility of risk reallocation among cooperative members as an alternative risk management institution. Based on deduction and extension of a model by Collins (1997) it is found that given adequate member heterogeneity in the cost of carrying risk and given low enough transaction costs there are, potentially substantial, gains from reallocation of risk among cooperative members.

Keywords: futures, hedging, reallocation gains, risk management, cooperatives, mechanism design