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Abstract

Volatility in dairy commodity markets has become a major concern for many in the dairy supply chain and is likely to remain so in the future. Changes to the Common Agricultural Policy (CAP) over the past decade have more closely aligned EU and World prices and their associated volatilities. The aim of this paper is to measure volatility at farm level in Ireland over time, identify possible reasons for the increased volatility and identify ways of reducing volatility. Statistical measures such as coefficient of variation (CV) and annualised standard deviation are used to provide measures of past volatility and its evolution over time. Family Farm Income (FFI) data, input data and farm gate milk prices are used to highlight historical farm level volatility. As farm level prices should be based on dairy commodity returns, the links between these prices and the farm gate prices are explored. Monthly wholesale prices for Skim Milk Powder (SMP), whole milk powder (WMP), and butter between January 1997 and March 2012 are used for this analysis. The time period is divided into two sub periods to quantify changes in volatility pre and post the Luxembourg Agreement. The results highlight that both commodity price and farm gate volatility has increased dramatically post 2007. Volatility will become a more inherent part of the dairy industry as policy changes cause prices to become further aligned with world prices. The findings of this research highlight that risk management strategies are desirable for the long term success of the dairy industry.

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