2006, Volume 14, Paper 4

ISSN: 1883-5675

A Survey of Price Risk Management in the Australian Cotton Industry

Tim Ada – Department of Primary Industry, Victoria

Bill Malcolm – Faculty of Agriculture and Food Systems, The University of Melbourne

John Williams – Price Risk Management Consultant and Educator

Abstract

Over 95 per cent of Australian cotton producers have attempted to manage price risk at some time, using a range of management strategies. Nearly 60 per cent of Australian cotton producers surveyed in this study stated that price risk management had a positive effect on their farm business. Findings from the study suggest that price risk management is only one of a suite of business management tools. Strategic use of price risk management tools can have positive outcomes.
A lack of understanding of price risk management and, more specifically, recent currency exchange losses and high production risks were the key contributing factors for the 21 per cent of the surveyed producers who stated that price risk management had a negative impact on their business.
Approximately 10 per cent of the cotton producers surveyed operated dryland production systems. These producers often incurred a broader range of production risks, and the resulting production uncertainty inhibited effective use of some price risk management strategies.
One in four of the surveyed cotton producers had an agriculture-related tertiary qualification, yet few (around five per cent) had undertaken any form of specialist price risk management training.
The primary conclusion from the study is that the uptake and effectiveness of price risk management in the Australian cotton industry is constrained by the extent of producer experience, confidence and understanding of price risk management principles and processes.

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