Thomas Foods: Hedging Strategies Research Paper

Pages: 5 (1433 words)  ·  Bibliography Sources: 4  ·  Level: Master's  ·  Topic: Agriculture  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] While there is no basis risk, there is the risk of default as the agreement is private and not overseen by the government (Contracts, 2014, Agriculture and Agri-Food Canada).

Other strategies

Keeping supplies low during times of volatility is another strategy such as stockpiling "feed grains, keeping only a week's worth in its mills at a time" when values are uncertain (Andrejczak 2008). This is "the cautious approach taken by buyers wary of locking in high prices when there is a chance prices in the…market might move lower" (Andrejczak 2008). Thus, when prices are high and locking in a price is not desirable, keeping supplies low and remaining responsive to potential market changes is another alternative. But once again, because so many fruits and vegetables are highly perishable, this strategy is not always realistic. For some commodities such as apples, corn, and dried and canned fruits and vegetables, it might be viable but berries, fresh tomatoes and other products are not.

On the other hand, low supplies can be an unproductive strategy if there is a sudden spike in demand. Responding to such upsurges are very difficult for produce companies, given the long lag time for produce to grow. While caution must be undertaken regarding stockpiling, low inventories are far from a perfect solution and unlike a generic commodity good which can be easily stored, each different item of produce must be evaluated on its own terms.

Hedging strategies from the point-of-view of the consumer

Companies are often quite clandestine about their hedging strategies in regards to other companies and also in terms of how much they disclose to the general public. "While many companies acknowledge they buy commodities futures and options contracts to hedge some of their costs, they are not all as forthcoming about the extent to which they do so. Details about hedging programs can be tightly guarded. Most companies don't like to discuss them at length, if at all, for fear of betraying their positions to the competition or offering others insight into how they assess market trends" (Andrejczak 2008). Hedging is a kind of 'betting' and the interests of the company seldom align with the entity with whom they are negotiating.

Hedging cash flow volatility is another strategy frequently used by companies as a way to facilitate investment. This type of hedging "can help with short-term price volatility, moderating fluctuations in cash flows and incomes" although from a consumers' point-of-view, "hedging does not make prices permanently cheaper nor prevent them from rising if that is their long-term direction" (Parsons & Mello 2011). It merely acts as a buffer for the company although this can mitigate short-term price spikes if the company is not threatened with financial instability.

Finally, should be noted that "hedging by local producers and processers doesn't necessarily protect local consumers from short-term price volatility. Profits and losses on a hedge go to smoothing investment, and are not necessarily passed along in product prices" (Parsons & Mello 2011). This is partially due to the fact that companies may strive to make as much of a profit as they can, while they can, rather than lowering prices for consumers' benefits. When engaging in a hedging strategy, if the company finds that it is indeed advantageous to its interests it must weigh the potential sales and good public relations it might generate from slashing prices due to advantageous hedging vs. keeping these profits

Conclusion

To 'hedge' an effective market strategy, Thomas should pursue a conservative approach: first and foremost attempting to lock in the most volatile prices for goods which have been historically challenging to predict for the organization. It may also need to pursue other hedging strategies, but these will be affected by the type of commodity being 'hedged' as well as more general financial considerations typical to all industries.

References

Andrejczak, M. (2008). Against the grain: Food firms hedge costs. The Wall Street Journal.

Retrieved from: http://online.wsj.com/news/articles/SB120632251149658521

Contracts: hedging in futures. (2014). Agriculture and Agri-Food Canada. Retrieved from:

http://www.agr.gc.ca/eng/industry-markets-and-trade/statistics-and-market-information/by-product-sector/crops/initiatives-supporting-producers/contracts-hedging-in-futures-and-forwarding/?id=1323991419503

Definition of basis risk. (2014). Investopedia. Retrieved from:

http://www.investopedia.com/terms/b/basisrisk.asp

Parsons, J. & Mello, A. (2011). Rising food prices: What hedging can and cannot do

Betting the Business. Retrieved from: http://bettingthebusiness.com/2011/06/27/rising-food-prices-what-hedging-can-and-cannot-do/ [END OF PREVIEW]

Four Different Ordering Options:

?
Which Option Should I Choose?

1.  Buy the full, 5-page paper:  $24.68

or

2.  Buy & remove for 30 days:  $38.47

or

3.  Access all 175,000+ papers:  $41.97/mo

(Already a member?  Click to download the paper!)

or

4.  Let us write a NEW paper for you!

Ask Us to Write a New Paper
Most popular!

Career Orientation of Bank Managers in Pakistan a Private Public Sector Comparison Term Paper


Ewom Communication and Brand Trust Term Paper


Electronic Health Records (EHR) -- Pharmacy Pension Term Paper


International Procurement Dissertation


Report of Transparency in Oil Extraction for Equatorial Guinea and Chad Research Paper


View 10 other related papers  >>

Cite This Research Paper:

APA Format

Thomas Foods: Hedging Strategies.  (2014, July 6).  Retrieved February 17, 2019, from https://www.essaytown.com/subjects/paper/thomas-foods-hedging-strategies/4162575

MLA Format

"Thomas Foods: Hedging Strategies."  6 July 2014.  Web.  17 February 2019. <https://www.essaytown.com/subjects/paper/thomas-foods-hedging-strategies/4162575>.

Chicago Format

"Thomas Foods: Hedging Strategies."  Essaytown.com.  July 6, 2014.  Accessed February 17, 2019.
https://www.essaytown.com/subjects/paper/thomas-foods-hedging-strategies/4162575.