Measuring Yield and Price Risks for Dairy Farms and Designing Risk Management Strategies: The Case of Tonya, Turkey

Abstract

In this study, a model for measuring and designing appropriate risk management strategies for dairy farmers was developed in Tonya district of Trabzon province, Turkey. Probability distributions of milk price and yield are derived to expose business and financial risk faced by dairy farmers. After designing appropriate dairy risk management strategies, existing risk management strategies were compared by using second-degree stochastic dominance (SSD). The results show that the total risk of dairy farmers is 57 % and the possible loss is approximately 2000$. Business risk is 50 % while the other half is attributed to financial rigidities. Research results also suggest that the most appropriate risk management strategy is transferring risk in order to ensure sufficient returns to meet debt services and to operate expense commitments in the research area. Based on the SSD results, income diversification through obtaining off farm income is the best way to transfer risk and marketing milk through sales cooperatives is the following alternative for dairy farmers.