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African Swine Fever is a Real Threat | Are You Protected?

December 12, 2019

By Rob Wolter & Ramon Paxton

African Swine Fever (ASF) strikes fear into the hearts of pig producers around the world. Have you thought about ASF? Are you protected?

What is ASF and where is it found?

According to the Food and Agriculture Organization of the United Nations (FAO), ASF is a highly contagious and deadly viral disease that affects domestic and wild pigs of all ages and can spread rapidly. It cannot be transmitted from pigs to humans, so it’s not a threat to human health, but it’s a significant threat to producers, their communities and the economies where it is found.*

ASF has been found in countries around the world. It was first identified in sub-Saharan Africa and more recently has spread to China, Mongolia, Cambodia, the Philippines, Myanmar, Korea and Vietnam, as well as part of the European Union. At this point, the disease has not been found in the U.S.

Why does ASF matter?

ASF has wreaked havoc on the pork industry in the countries where it has been found, but that’s just the pebble in the pond. This type of event ripples through many other areas as well – consider the following:

  • Shortages and pricing – There have been dramatic shortages of pork and prices have tripled in Additionally, pork prices in Europe, Brazil and the U.S. have been increasing. Finally, growing supplies and recent trade battles have affected meat cut prices, which may mean prices have been discounted compared to their potential.
  • Exposure – Your exposure to meat cuts and any associated animal byproducts could be impacted.
  • Supply and demand – Growing supplies and recent trade battles have affected meat cut prices, which may mean prices have been discounted compared to their potential.
  • Expansion and demand growth in other categories – There has been massive expansion in poultry and fish production and consumption, as well as a dramatic increase in beef demand as it is viewed as a healthier option, especially in the middle and upper classes.
  • Animal feed – Fewer pigs need less feed, which translates into fewer bushels of corn and soybeans needed, both domestic and imported.
  • Local economies – This disease has forced producers to kill millions of pigs, which means they have lost a potentially large income source, and in turn have less to spend to support their local economies. Because pork is a staple, price inflation is spilling over as a driver of overall inflation of +3% in China.
  • Broad scale – The fact that ASF has forced producers to cull their herds affects the number of pigs available, but it doesn’t necessarily change the consumer demand. The countries with ASF then need to decide how to address the issue of demand without the supplies they were expecting to have. That could mean increased imports or rising prices. Those actions have their own ripples.
  • Threat level – Mark Schipp, president of The World Organization of Animal Health (OIE), said ASF is the “biggest threat” to commercial pig production in history and could result in the loss of one-quarter of the world’s pig population.*

 How are you protected?

Having a risk management strategy is important in the livestock space. Overall, the meat sector is behind on hedging and risk transfer, especially taking into account the current unprecedented decline in total protein supplies. There may be more volume in other areas of agricultural commodity hedging, but there are significant opportunities with livestock that should be considered.

From a producer perspective, do you know your options? Have you done analysis on your margins versus your cost of goods? If you sit in the consumer space, what are you seeing around volatility and optionality? In either case, Cargill Risk Management is here to help. We offer over-the-counter (OTC) hedging solutions that provide flexibility for our customers’ risk management needs. Are you looking for a meat swap? We can help you create that. We listen and support our customers in finding the solutions that will best suit their needs.

Think about your exposure and where you can offset that risk. Then, call us to help you put together a risk management strategy that will help your business move forward.

 

*Sources: FAO http://www.fao.org/news/story/en/item/1204563/icode/; Feed Strategy, https://www.wattglobalmedia.com/publications/feed-strategy/

Understanding Your Risk Through Stress Testing

November 11, 2019

By Mikel Badiola

 A snapshot, a photo, a moment in time – when you are managing your risk, being able to test against a moment in time is vital. In this article, we will explore why using stress testing and Value at Risk (VaR) can support your risk management goals.

Let’s start with some definitions

Stress testing is a simulation technique used to evaluate a portfolio against underlying futures price movement. This can help determine portfolio risk and show how market price movements could potentially impact that portfolio. It also helps our customers identify mitigating or strategic actions and controls for specific scenarios.

Value at Risk (VaR) shows the maximum loss for a given probability during a certain period of time. A stress test is essentially an exercise to explore how changes in market conditions affect our estimates for VaR.

A quick overview of stress testing

As mentioned earlier, a stress test can help teach you how your position may behave in a variety of scenarios. At Cargill Risk Management, we use two scenarios when we conduct a stress test for customers. The two scenarios use similar methodologies, and each is based on the underlying futures price movement. Here’s how that is calculated:

Determine the previous day’s closing price

Move that closing price two standard deviations, using an implied volatility or a 50-day published historical volatility, to a 95 percent degree of confidence.

Once the underlying futures price movement is established, we can perform the scenario analyses:

Scenario #1: Five-day stress move

This gives us an idea of how much the market might move within the immediate five-day period. This scenario assumes there is some discipline in place, where you review these positions on a weekly basis. This could be a weekly meeting or another weekly routine where you consider the scenarios to help you proactively consider how you will act or rebalance depending on what happens during a given week.

Scenario #2: Potential Stress Move

This gives us an idea of how much the market might move over a longer period of time (until the expiration of positions) and can be considered an extreme, yet plausible, scenario.

Implied volatility WH0 (@530) = 25%?

95% confidence that the price will move within 397.50 cents/bushel and 662.50 cents/bushel

 Why stress testing is important

There are many factors that affect the market – supply and demand, crop yields and the associated weather trends, trade wars and many more.

A stress test is a good exercise to help you and your team understand your positions and make decisions about whether to keep moving forward with what you have in place or make changes to your portfolio.

At Cargill Risk Management, stress testing is one vital component of building comprehensive hedging and risk management discipline. Recurring stress testing helps your team and company go through the paces of different financial scenarios to lead efforts towards proactive risk identification and action recommendations.

Think about this – when the market goes against your portfolio, how do you currently address it? This type of stress testing helps you prepare ahead of time to be proactive instead of falling back on the emotions that can often bias our decisions. When you have a plan ahead of time, you remove the emotional response from the equation and can act with confidence.

Read more about the market’s irrationality here.

Cargill Risk Management is here to help you think through your challenges and needs – and ultimately find the over-the-counter (OTC) hedging solutions that can help manage your risk. We work with customers to stress test and educate them about how their portfolios behave and what the future could hold.

 

Finding the Right Hedging Tool in Your Toolbox Relative to Commodity Volatility

October 4, 2019

By Federico Stiegwardt

You wouldn’t use a hammer for a job that requires a screwdriver would you? Think about your risk management in the same way. Modern hedging portfolio trends combine different tools and actions to help manage the risk in a portfolio and protect against unpredictable market scenarios. The following graph shows how different market moves create positive or negative outcomes and how a combined portfolio works through the lens of a commodities consumer.

Using different tools makes sense from other aspects as well – cost, availability of credit, impact on working capital, cost/benefit, etc. The table below provides a quick overview.

You can learn more about building a diversified hedging portfolio in and the benefits of diversifying in another article we have posted, so we won’t go into detail on that here.

For this discussion, we are looking at when to use leverage in hedging strategies.  

The principle shown in the graph above seems logical. It follows the standard “buy low, sell high” strategy. Now, here are the questions: What is high? What is low? Commodities markets have seen wide extremes in volatility due to the financial crisis, commodity cycles, trade wars and other major economic events.

Currently, volatility in commodities is perceived to be low versus those historical measures, so the next graph (source Bloomberg) attempts to start making sense of how to be alert of different measures that should be part of your consideration set when setting your risk management strategy.

Source: Bloomberg; volatility graph as of September 26, 2019

Definitions

  • Three Month Implied Volatility: Derived volatility from current options prices.
  • Three Month Realized Volatility: Actual three-month realized volatility in the underlying contract
  • Volatility Average: Average Range observed.
  • High / Low: Extremes observed during a period of time.

Observing the following should give us a good sense if we should buy options, sell them or use them with measure to design hedging solutions.

  • Where is each commodity’s volatility now?
  • How is it priced on the ask of options prices?
  • What has the actual behavior been in the last three months?
  • How do current levels compare versus a period average?

This article is not recommending a specific strategy of either buying or selling options. Instead, the idea is to build on what we know from previous articles and add to that the observations from above. Here are some things to think about:

  • Tool selection and mix in a hedging portfolio should not be static. This should be a dynamic exercise.
  • As volatility changes, the allocation of percentages of what tools to use should also change.
  • As volatility and prices are reduced, analysis should include considering tools buying optionality.
  • As volatility and price of options increase, analysis should include considering using the value of options to take advantage in a balanced portfolio (in moderation and with limits).
  • Past strategy mix selection success will not guarantee future success when volatility changes.
  • Cyclicality should be taken in consideration, since some commodities are subject to seasonal changes in volatility (i.e. agriculture during crop season).

If you have questions about this topic or would like to learn more about leverage in hedging, Cargill Risk Management is here to help!

Risk Management Check-Up | Considerations Before Harvest

September 23, 2019

Do a check-up on your risk management strategy before harvest.

Next Page »

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  • Understanding Your Risk Through Stress Testing
  • Finding the Right Hedging Tool in Your Toolbox Relative to Commodity Volatility
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