An Application Of Risk Contingent Credit Applied To New York Dairy Farms With U.S. Options On Class Iii Milk Futures

摘要

The present day realities facing New York dairy farmers and all dairy farmers is an example of when business risk become so severe that the residual impact on financial risk become acute. While financial risk is ever present, stress results only when conditions arise in which downside risk result in a return on assets insufficient to meet fixed financial obligations. Thus, it is proposed in this paper the use of commodity linked credit to balance financial and business risks faced by New York dairy farmers. In this paper, commodity linked credit refers to a suite of financial products in the form of operating loan and mortgage with payoff schedules tied to the price of class III milk futures price. To apply commodity linked credit, a represent farm financial statement is established and modified. Monte Carlo simulation is then used to analysis the effect of commodity linked credit. By comparing return on assets (ROA), return on equity (ROE) and other financial parameters before and after implementing commodity linked operating loan and mortgage, conclusion is reached that commodity linked credit is a proven method to hedge business risk and financial risk.