Viability of introducing milk futures contracts in Brazil: a multiple criteria decision analysis

Abstract

The viability of introducing milk futures contracts in Brazil was assessed through a combination of multiple criteria decision analysis and the application of traditional principles from the theory of success and failure of futures trading. Commodity-specific attributes and market-related aspects were analyzed for chilled raw milk, ultra high temperature (UHT) milk, and milk powder. The analytic hierarchy process methodology was used to rank the commodities in terms of their feasibility prospects. Among them, it was ascertained that chilled raw milk is the most suitable for futures trading. Major reasons for this result are the product's high price volatility, the competitive nature of its markets, the absence of competing risk-management tools, and the impossibility of cross-hedging. Complementing the analysis, interviews were conducted with the 100 largest milk producers in the country to assess their perceptions regarding futures trading. Approximately 92% of these farmers expressed an interest in adopting milk futures contracts as price risk management tools. In conclusion, the analysis indicated that the introduction of a milk futures contract in Brazil has a high probability of success. [EconLit citations: Q130, C610, 0220]. © 2008 Wiley Periodicals, Inc.

Determinants of Successful Agri - Futures Contracts in India

“…The results presented in Table 4 point out that spot market volatility has a positive impact on contract success. The result is consistent with the past studies (See Black, 1986;Corkish et al, 1997;Siqueira, da Silva, and Aguiar, 2008;Hung et al, 2011;Till 2014;Webb, 2015), which have stated this as the most crucial condition for the contract to be successful. A volatile spot market results in the commercial need for hedging to reduce the price risk and thus it is more likely that the contract will be successful.…”

“…Bollman et al (2003) observe that diammonium phosphate futures contract at Chicago Board of Trade (CBOT) failed because of a weak association between the spot and futures prices, making the futures contract to be an inefficient tool for price risk management. Siqueira, da Silva, and Aguiar (2008) recommend the introduction of milk futures contracts in Brazil by analyzing various aspects specific to commodity and markets. They highlight the role of high volatility and competition in the spot market, the absence of traditional risk management mechanism and no cross-hedge possibility in their explanation.…”

“…Competing contracts may divert trading from the existing market (Black (1986) and Brorsen and Fofana (2001). Alternatively, some studies point to that competition may have a positive impact too through more revenue generation (Tashjian and Weissman (1995); Corkish et al (1997); Hung et al 2011)) and spread trading (Webb, 2015) 3.2.5 Internationally listed (INT) -Theoretically, Corkish et al (1997); Siqueira, da Silva, and Aguiar (2008); Hung et al (2011), the international listing (listed on an exchange outside of India) could be a conducive factor for derivatives trading by creating multiple reference points, incorporating the influence of global factors. Conversely, it is also postulated that in the presence of a cross hedge, a new derivatives contract would find it difficult to succeed in the face of competition.…”

“…On the other hand, a small contract suffers from the issue of greater administrative expense, which can be offset if there are higher volumes in the derivatives market. (Siqueira, da Silva, and Aguiar (2008); Hung et al (2011), Webb 2015). We measure the contract size by estimating the amount of money required to trade one lot of the commodity contract (Future price * lot size).…”

Market development and policy issues for agri-derivatives in India: a study of cotton and mentha

“…The literature illustrates the role of a derivatives market in efficient price discovery and risk hedging (Garbade and Silber 1983;Thomas 2003;Gonzalo and Figuerola-Ferretti 2007) and in economic development (Sendeniz-Yuncu et al 2018;Vo et al 2019). Many studies have been conducted in developed economies; some show that futures markets improve the price discovery process (Garbade and Silber 1983;Oellermann et al 1989;Schroeder and Goodwin 1991;Brockman and Tse 1995;Zapata et al 2005), and a few studies show that the perception of market participants plays a vital role in determining the success of a commodity derivatives market (Siqueira et al 2008;Adanacioglu 2011).…”