Traditionally risk pooling and risk spreading techniques are utilized by farmers for risk management. Risk pooling techniques include all price smoothing mechanisms organized by groups of producers. For example, average pricing for a crop year as offered by co-operatives is a very efficient risk management instrument. The farmer delivers his crop at harvest time and receives an advanced payment. He will receive a bonus in June in order to obtain the average market price of the past crop year.
Some co-operatives offer a price averaged according to specific periods of time. For example, a farmer who decides to store his grain on the farm can contract at harvest a February delivery. He will receive the average price of a three-month period based on the date of delivery. For livestock production, some co-operatives offer moving average prices; for example, a twelve-week average price. These price smoothing techniques reduce the impact of price volatility and the related risk premium for the farmer. However, the use of reference markets – centralized and organized markets, spot markets and/or futures markets – is necessary.
Some co-operatives offer a price averaged according to specific periods of time. For example, a farmer who decides to store his grain on the farm can contract at harvest a February delivery. He will receive the average price of a three-month period based on the date of delivery. For livestock production, some co-operatives offer moving average prices; for example, a twelve-week average price. These price smoothing techniques reduce the impact of price volatility and the related risk premium for the farmer. However, the use of reference markets – centralized and organized markets, spot markets and/or futures markets – is necessary.
