Managing Market Risk
· Disclaimer
· Acknowledgements
· Table of Contents
· Additional Information
· Download the course in PDF
Introduction
Not a day goes by that we don't hear about inflation, interest rates, unemployment, cost of living, weather disasters, wars, government cutbacks, etc. All of these can result in some form of economic impact on each of us. In the world of agriculture, whether you are a grain or livestock producer, a processor or merchandiser, the inherent price risk associated with your operation cannot be ignored. An adverse price change can result in substantial economic loss at worst, or at best, reduced profits.
Managing market risk must be a key element in marketing and is increasing in importance as we move to a global economy and reduced government support programs. Risk can take on different forms, in varying degrees, depending on the individual or firm's financial position, cash flow position and need to avert risk.
Not all risks can be controlled or protected by traditional insurance. Price risk is one such risk. As illustrated in Chapter 1, price changes can have a dramatic financial impact on agribusiness. Increased market volatility as governments remove commodity-specific programs, price supports and set aside programs will demand that attention be paid to risk management as a must for survival.
This course is designed to help you identify market risks and quantify those risks so that appropriate/necessary risk management tools can be employed in your marketing plan. Farming today, whether it be crop or livestock production, is highly specialized and heavily capitalized. It is this high capitalization of land, buildings and machinery which expose today's agribusiness to significant risk and warrants a study of risk management.
The ability to "lay off" price risk using futures markets make them a useful tool for grain and livestock producers, processors and merchandisers alike. Cash and option contracts have links to futures markets that need to be addressed and explained so their value can be better determined by the individual.
The objective of this course is NOT to make you a futures trader, but rather to introduce the concept of risk management as it pertains to farm marketing. Much time will be spent defining the terminology and jargon associated with futures options and cash contracts. The simple mechanics of futures trading for hedging (risk management) purposes will be defined and highlighted in the examples provided in each chapter. Examples for a variety of commodities are provided and while they may not always be specific to your operation or the commodity you produce, they do illustrate how a simple hedge can be used to manage price risk.
Upon completion of this course, you will have a good, basic understanding of futures, options, and cash market contracts as risk management tools. You will acquire the necessary knowledge and understanding to incorporate basic risk management strategies into your marketing plan and be well positioned for entry into a more advanced and detailed course on futures and options.
Disclaimer
Information was taken from sources which were believed to be accurate at the time of printing. The reader should verify current contract specifications and other relevant information before using any of these products. The examples provided in the course material are purely for the purpose of illustration and should not be construed in any way as a recommended trading strategy or current market conditions.
Acknowledgments
Valuable comments and assistance were provided by provincial government officials from across Canada, as well as the staff of the Canada Farm Business Management Council. The final organization of the material, editing, rewrites and additions to the material were carried out by Robert Matheson and John Caldwell of Agriculture & Agri-Food Canada. The assistance of Terri Epps in editing and formatting the material is also appreciated.