Cross-Hedging on the Milk-Derived Product Market

Abstract

This paper investigates hedging and cross-hedging internationally traded milk derivative products with internationally traded commodities, recently launched New Zealand dairy futures, New Zealand agricultural products, and mature United States dairy market futures. The contribution of the paper is threefold. First, we show that international dairy commodities are a distinct commodities subgroup, as changes in prices of dairy products are uncorrelated with other worldwide traded commodities. Second, New Zealand Stock Exchange dairy futures are an effective tool for hedging exposure to international dairy commodities. Third, Chicago Mercantile Exchange dairy futures are inefficient both for hedging international dairy commodities and for hedging US dairy commodities. Our findings have important implications for understanding efficient methods of hedging with futures contracts on highly regulated markets with government agency interventions.