Cross-Hedging Distillers Dried Grains: Exploring Corn and Soybean Meal Futures Contracts

Ethanol mandates and high fuel prices have led to an increase in the number of ethanol plants in the U.S. in recent years. In turn, this has led to an increase in the production of distillers dried grains (DDGs) as a co-product of ethanol production. DDG production in 2006 is estimated to be near 11 million tons. A sharp increase in ethanol production and thus DDGs is expected in 2007 with an increase with the number of ethanol plants. As with most competitive industries, there is some level of price risk in handling DDGs and no futures contract available for this co-product. Ethanol plants, as well as users of DDGs, may find cross-hedging DDGs with corn or soybean meal (SBM) futures as an effective means of managing risk. Traditionally, DDGs are hedged using only corn futures.

Effective Basemetal Hedging: The Optimal Hedge Ratio and Hedging Horizon

This study investigates optimal hedge ratios in all base metal markets. Using recent hedging computation techniques, we find that 1) the short-run optimal hedging ratio is increasing in hedging horizon, 2) that the long-term horizon limit to the optimal hedging ratio is not converging to one but is slightly higher for most of these markets, and 3) that hedging effectiveness is also increasing in hedging horizon. When hedging with futures in these markets, one should hedge long-term at about 6 to 8 weeks with a slightly greater than one hedge ratio. These results are of interest to many purchasing departments and other commodity hedgers

Cross-Hedging Distillers Dried Grains Using Corn and Soybean Meal Futures Contracts

Ethanol mandates have led to an increase in the production of distillers dried grains (DDGs), a co-product of ethanol production that is incorporated into livestock rations. As with most competitive industries, there is some level of price risk in handling DDGs, and there is no DDG futures contract available for managing price risk. Commonly, DDGs are hedged using only corn futures. Our results suggest that cross-hedge risk may be reduced by including soybean meal futures in an encompassing cross-hedge strategy. Further, we also conclude soybean meal futures currently may be slightly more effective at reducing risk than in the past.cross-hedge, distillers dried grains, ethanol, price risk, Agribusiness, Demand and Price Analysis,

The new risk management: the good, the bad, and the ugly

At one time, risk management was limited to insurance and the avoidance of lawsuits and accidents. The new risk management also includes using tools developed for pricing financial options for the management of financial risks within the firm. Trading in financial markets based on these tools can insulate companies from the risk of changes in interest rates, input prices, or currency fluctuations. In this article Philip H. Dybvig and William J. Marshall introduce the new risk management and the policy choices firms should be considering.Management ; Risk

Commodity procurement risk management with futures contracts: a dynamic stack-and-roll approach

Procuring material from commodity spot markets can flexibly fulfil a forward production demand, but increase the risk of high procurement cost due to spot price volatility. In this paper, a dynamic stack-and-roll hedging approach using futures contracts is proposed. The approach aims at mitigating the procurement cost risk and optimising the terminal revenue received from the procurement and hedging activities. It separates the procurement planning horizon into multiple stages, along with varying hedging positions in the nearby futures contracts. Hedging positions are adjusted in response to commodity price behaviour and contemporary perceived information about forward production demand. Guided by the mean-variance criteria over the terminal revenue, dynamic programming is applied to derive a closed-form solution for optimal hedging positions in a discrete-time Markovian setting. Numerical experiments are carried out to assess the proposed approach with explicit solution in a realistic stochastic environment. The price processes are modelled by a fractal nonlinear regression model using real price data of China’s commodity market, while demand information process is modelled by Bayesian formula. The results show that the proposed approach outperforms naive hedging strategy, and effectively mitigates the procurement cost risk.postprin

Managing Agricultural Price Risk in Developing Countries

We survey the experience of risk management in developing country agricultural supply chains. We focus on exposure, instruments, impediments to access and developing country futures markets. We draw on lessons from experience over the past two decades.Commodities, Risk Management, Developing Countries

Commercial Grain Merchandisers: What Do They Need to Know?

Little information exists on grain merchandisers, their characteristics, and the skills needed to be successful. This research contributes toward filling this gap. A summary of survey responses from 230 experienced grain merchandisers quantifies personal characteristics, skills perceived as important, and desire for executive education. Parametric analyses identify factors contributing to merchandisers’ salaries and their interest in establishing a certification process. Interestingly, experience but not formal education significantly enhances salaries.grain merchandiser, marketing, (executive) education, certification, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Consumer/Household Economics, Crop Production/Industries, Teaching/Communication/Extension/Profession,

Feeding Ourselves Thirsty: How the Food Sector is Managing Global Water Risks

The global food sector faces extraordinary risks from the twin challenges of water scarcity and water pollution. Growing competition for water, combined with weak regulations, failing infrastructure, pollution and climate change impacts threaten the sector's water security and contribute to a water availability emergency that was recently ranked the world's "top global risk" by the World Economic Forum.This report examines how water risks affect the profitability and competitive positioning of 37 major food sector companies in four industries: packaged food, beverage, meat and agricultural products. It evaluates and ranks these companies -- the majority of which are U.S. domiciled and publicly-traded -- on how well they are positioned to anticipate and mitigate these risks, as well as contribute to improved water resource management.The report provides recommendations for how analysts and investors can effectively evaluate food sector companies on their water risk exposure and management practices. It also provides recommendations for how food companies can improve water efficiency and water quality across their operations and supply chains to reduce risks and protect water resources