Stock Exchange-traded contracts could improve hedging and planning reliability for farmers by tackling high volatility, according to a new report from the European Commission.
Private sector financial instruments such as futures and options can help farmers to tackle risks stemming from unforeseen price shocks and enhance planning reliability.
Dairy financial products have been around in the United States since the 1990s, while such contracts were only introduced in the European Union (EU) as recently as in 2015 in the current form.
Volumes traded are still low but significantly increasing, thus showing a growing interest for futures in the dairy market.
Futures are standardised (by quality, quantity, delivery date etc...) forward contracts negotiated at Exchanges.
Futures can be based on physical delivery of the underlying asset or on cash-settlement, i.e. by only making a payment in cash when the contract expires, without physical exchange of goods.
To minimize credit risk, the futures exchange requires both parties to put up (and then to maintain) initial cash amount known as the margin. Futures are the largest traded instrument.
