If you are in the commodities space right now, you know the pressures facing producers and consumers. From the trade war and African Swine Fever to the decline in protein supplies, trying to manage your risk in the commodities space can feel like a putting together a puzzle with a missing piece. In addition, the emphasis on Alternative Marketing Agreements makes finding the perfect hedge a challenge for producers.
What are the puzzle pieces you need to put together for a solid risk management strategy?
#1: Understand your exposure and what’s driving current prices
What puzzle pieces do you need to pay attention to in order to meet your objectives? Here are a few examples of commodities that might be on your list along with some of the factors that could be affecting them.
#2: Understand how to protect your margin
Producers are forced to manage price risk by accepting an imperfect correlation and utilize a variety of futures and options strategies to protect margins.
#3: Know your cost of goods
For end users, hedge accounting rules can often limit a company’s ability to protect itself, unless it finds a perfect connection to the specific meat cuts they buy. This approach can be extremely expensive if it’s done in the physical supply agreement, or there may not be risk management solutions that address the specific needs that company has.
#4: The missing piece – managing the risk on the first three points
Whether you are a producer or consumer, exposure in hogs and other meats can be challenging, but like any other commodity space, the key to putting the pieces of the puzzle together is having a good risk management strategy in the first place.
Learn more about how to develop an effective hedging and risk management program in our 8-Step Checklist. When you understand the pieces, you have more ability to objectively assess your business needs and apply strategies that will help you effectively manage your risk.
Once you have a program in place, think about how you can apply the DDC approach. (This is a quick overview of a longer article – find more details on the DDC approach here.)
- Diversification – use a variety of strategies to help you benefit from the variety of paths the market may take.
- Discipline – execute your plan rather than waiting and hoping your target will eventually come into sight. This means you have to stay focused on your objectives and make decisions based on the current market versus past positions. Set your plan and stick to it!
- Controls – put a series of controls in place to ensure deliverables are executed. This might include reporting, stress testing, oversight and regular dashboards.
When it comes to your exposure in hogs or other meats, Cargill Risk Management can be part of the solution:
- Offering an over-the-counter (OTC) marketplace for meats
- Supporting new contracts, like the pork belly contract that is reemerging (more to come in a future article)
- Creating liquidity for buyers and sellers
Cargill Risk Management is at the cutting edge when it comes to finding specialized solutions for customers. With our ability to work through the physical side of the business within Cargill, we can help you find a comprehensive solution to manage your risk.