Small farmer price “insurance”

Milk farmers have a serious problem. The prices of milk fluctuate above and below their COGS throughout the year, leaving the farmers’ incomes unstable and unpredictable. This problem is then aggravated by several other issues. First, the average milk farm only has ~120 cows, which results in a production amount too low to hedge with traditional futures and options. Even if the production was higher, though, milk farmers generally do not understand how to hedge, leaving them without a means to stabilize and predict their income.

This is a solvable issue if one takes a step back and looks at the problem in its whole rather than on an individual level. First, there are a few things to consider: For one, farmers do not need the price at a particular second like a trader may – they have a longer time horizon. Also, while farmers may not even understand the concept of hedging, they do understand insurance. Lastly, farmers are now becoming more and more computer literate (40% in 2009).

Evaluating these factors in combination, one arrives at a simple solution: an online platform that allows farmers to buy and manage “insurance” on their production. In the backend, a hedge would be created by grouping the farmers together and using existing markets to offset the risk.