Clark, Jordan2022-11-142022-11-142019-08https://hdl.handle.net/11299/243054University of Minnesota M.S. thesis. 2019. Major: Applied Economics. Advisor: Marin Bozic. 1 computer file (PDF); 46 pages.Up until the enactment of the 2018 Farm Bill (“Agricultural Improvement Act of 2018”), available CME futures contracts did not consistently converge to costs paid by manufacturers of packaged milk. Due to the lack of convergence, CME dairy futures were inadequate risk management tools for the packaged milk industry. Seeking to increase convergence between the available CME futures contracts and underlying costs in the packaged milk industry, dairy trade organizations proposed a reformed pricing formula in 2017, which was ultimately included in the 2018 Farm Bill and enacted beginning with the May 2019 Class I milk price. The newly reformed formula was designed to strengthen the price relationship between available CME futures contracts and Advanced Class I skim milk prices without having a long-term directional influence on average Advanced Class I skim milk prices paid by packaged milk manufacturers or milk producer pay prices. This study quantifies the impact that the newly reformed pricing formula would have had on milk producer pay prices between 2000 and 2017 – the period that informed the design of the new pricing formula. This is the first study to quantify how the change of the pricing formula would have affected producer pay prices in different regions and the first to identify optimal hedging ratios of the reformed pricing formula. We find that between January 2000 to December 2017, average uniform prices for each federal milk marketing order would have differed by less than $0.01/cwt when comparing the previous and current Class I pricing formulas. We also find that that uniform prices are more volatile in federal milk marketing orders with the highest Class I utilizations and, had the newly reformed pricing formula been in place, would have reduced volatility in all FMMOs between 2000 and 2017. We also find that the basis risk of varying hedging strategies is significantly reduced under the reformed formula as compared to the previous formula. Furthermore, we identify optimal hedge ratios for the reformed Class I formulas.enBasis RiskDairy PolicyFederal Milk Marketing OrderFluid Milk HedgingMarket VolatilityMilk PriceThesis or Dissertation