Financial and risk management in agricultural cooperatives with application to the milk industry in New Zealand

Abstract

This paper studies the financial and risk management specific to agricultural cooperatives (co-ops). In order to acquire the necessary risk capital to implement competitive strategies, like value-added processing, many agricultural co-ops are adopting capital structure innovations. Fonterra, a leading and dominant company in the New Zealand dairy industry, is one such typical case. We propose a Markov decision process (MDP) model for Fonterra to make better decisions, taking into account uncertain information on milk supply, share price, milk price and farmers' investment behaviour.The objectives are to maximise equity holders' returns over time and also to minimise financial risks. Themodel is solved through an approximate dynamic programming algorithm. We also investigate the efficiency of several risk management policies through numerical experiments. The results reflect the trade-offs involved in the financial decisions, show the importance of designing effective risk management policies and yield some suggestions to mitigate financial risk.

Keywords:

• Agricultural cooperative
• supply chain finance
• Iinvested capital
• financial and risk management

Acknowledgments

The authors thank the referees, Associate Editor and Department Editor for their careful, constructive and obviously time-consuming reading and commenting on this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Reference Commodity Products include whole milk power (WMP), skim milk power (SMP) and their by-products, which are buttermilk power (BMP), butter and anhydrous milkfat (AMF).

Additional information

Funding

This work was supported by National Natural Science Foundation of China [Grant 71901054] and SfTI National Science Challenge [Grant CRSS4-2016]. The research of X. Qian was supported in part by China Scholarship Council and Funds of Liaoning Provincial Department of Education [Grant LN2019Q34] and T.L. Olsen was supported in part by Te Pūnaha Matatini Centre of Research Excellence.

Notes on contributors

Xiaoyan Qian

Xiaoyan Qian is an Assistant Professor of Operations and Supply Chain Management in the School of Management Science and Engineering at Dongbei University of Finance and Economics in China. Xiaoyan received her Ph.D. at the University of Auckland business school in 2017, New Zealand. Xiaoyan's research interests include agriculture supply chain, stochastic models, dynamic programming. Her research currently focuses on the modelling contracts and incentives in agricultural co-ops with an emphasis on operational and financial decisions. Her work with Professor Tava Olsen ‘operational and financial decisions within proportional investment cooperatives’ has been published in Manufacturing & Service Operations Management.

Tava Lennon Olsen

Tava Olsen is Professor of Operations and Supply Chain Management, Director of the Centre for Supply Chain Management, and Acting Deputy Dean at the University of Auckland Business School. Prior to joining Auckland, she was Professor of Operations and Manufacturing Management in the Olin Business School at Washington University in St. Louis. Tava received her Ph.D. from Stanford University. Tava's research interests include supply chain management and stochastic modelling of manufacturing, service and healthcare systems. She is a past president of the Manufacturing and Service Operations society and has twice been awarded the Auckland Business School's research excellence award.