The effect of price and production risks on optimal farm plans in Swiss dairy production considering 2 different milk quota systems.

The amount of milk produced on Swiss dairy farms is restricted by contracts between the farmers and their marketing agent. In the past, these contracts have been calculated on a yearly base. Due to a switch in agricultural policy, these yearly contracts are currently more and more replaced by contracts calculated on a monthly base. These new contracts are assumed to restrict the flexibility of farmers to react on changes in milk price as well as on changes in fodder availability. Thus, the contract design is expected to influence farmers' ability to cope with risks and, thus, to influence the farm's gross margin variability. Applying a bioeconomic whole-farm model, the effects of price and weather risk as well as different risk-management strategies on the gross margin and the variability of the gross margin in Swiss dairy production are assessed under the 2 contract designs. We consider both risk-neutral and risk-averse behavior of farmers in our study. Results show that gross margin is slightly higher under the yearly than under the monthly contract. Variability of gross margin is also higher under the yearly than under the monthly contract. If the farmer is assumed to be risk averse, under both contracts he can reduce the coefficient of variation of the gross margin by almost 20% at opportunity costs below 1% of the gross margin. To reduce variability of gross margin under both contracts the size of the feedstock needs to be increased. This increase, however, must be considerably higher under the monthly contract than under the yearly contract. An additional risk-management strategy under a monthly contract is an increase in the area used as intensive pasture to ensure fodder availability in years with unfavorable weather. Under the yearly contract, an increase in the area used as extensive pasture is shown to be more favorable because it increases the amount of direct payments the farmer will receive. Additional restrictions in farm management due to a monthly milk contract do not lead to a higher variation in gross margin. However, if a farmer agrees to a monthly contract, he needs to adapt his risk-management strategies. Furthermore, our results show that farmers have to be aware that they will need additional barn capacities to reduce variation in gross margin under a monthly milk contract.