Insurance prospects after the European dairy quota abolition

The expected increase in milk price volatility after the milk quota abolition in the EU will lead to further planning uncertainty on dairy farms. Consequently, the modest supply of insurance and the hedging of milk prices through futures may increase. To shed more light on this possibility, the purpose of this paper is to calculate the additional willingness to pay (WTP) for risk-averse dairy farmers in order to cope with milk price volatility after the quota abolition.

After the European dairy quota abolition, European dairy farmers will be more dependent on the milk price of the world market. To reflect the world market, a time series of milk prices of a dairy processor from New Zealand (NZ) was used because NZ is exporting most of their dairy products under world market conditions. Based on the NZ price series, we approximated milk price volatility after the European dairy quota abolition and calculated the additional WTP of risk-averse dairy farmers in order to cope with milk price volatility.

Using a price series of NZ to approximate milk price volatility after the European dairy quota abolition and comparing it with a German milk price series before quota, the results suggest there might be increased WTP after the milk quota abolition in order to cope with milk price volatility. Following this assumption, the WTP of considerable risk-averse dairy farmers may exceed the initial transaction costs of hedging milk prices with futures on commodity exchanges. Nevertheless, a qualitative discussion of the results shows costs of education, basis risk, and the small size of farms could still keep dairy farmers from hedging the milk price.

In calculating the additional WTP for risk-averse dairy farmers to cope with milk price volatility, this is the first study to attempt to illustrate the expected influence of increasing milk price volatility at the dairy farm level after the dairy quota abolition in the EU. The additional WTP gives further insights into the need for and acceptance of insurance after the dairy quota abolition at the dairy farm level.