5. Empirical Issues Relating to Dairy Commodity Price Volatility

The EU dairy industry faces an unprecedented level of change. The anticipated removal of milk quotas and the move to a less restricted global trade environment will provide the industry with both opportunities and challenges. The primary challenge will be the need for the industry to deal with more volatile prices. Active management of the risks associated with these more volatile prices will help to place the industry in a more competitive position. By quantifying the increases in EU butter and Skim Milk Powder (SMP) price volatility, this chapter demonstrates one of the consequences of the more recent reforms of EU dairy policy. Comparison with comparable world prices also provides an indication of how this volatility might evolve. This analysis employs a number of techniques to quantify the increased volatility from the simple and intuitive to more complex time series models (GARCH). In all cases increased volatility in EU dairy commodity prices is clearly evident suggesting that the challenges associated with high levels of price volatility need to be addressed as a priority.