Managing Your Profit Margin Despite Unpredictable Hog Prices and Feed Costs
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The document outlines a presentation given by Commodity & Ingredient Hedging, LLC on managing risks from unpredictable hog prices and feed costs. The presentation covers establishing a commodity price management policy, modeling operations to identify forward margin opportunities, and selecting hedging strategies. Key steps include creating a hedge policy, objectively analyzing margins under different price scenarios, and choosing strategies that fit an operation's needs to implement an effective risk management plan.
Managing Your Profit Margin Despite Unpredictable Hog Prices and Feed Costs
- 1. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com 2010 Pork Management Conference Managing Your Profit Margin Despite Unpredictable Hog Prices & Feed Costs
- 2. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Today’s Topics: Establishing a commodity price management policy (hedge policy) Modeling your operation to identify forward margin opportunities Basics of strategy selection
- 3. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Establishing a Commodity Price Management Policy (Hedge Policy) and Internal Reporting
- 4. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com What is a Commodity Price Management Policy? A Commodity Price Management Policy states the company’s views regarding transactions in cash (physical) contracts, futures contracts and option contracts. Benefits of a Commodity Price Management Policy include: • Promotes discipline throughout the organization • Allows for Executive Management oversight and review • Delegates administrative duties and management decisions • Defines responsibilities and accountabilities • Provides direction to everyone involved in price management
- 5. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Sample Commodity Price Management Policy
- 6. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 7. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 8. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Creating a model of your operation: Worksheet Information
- 9. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 10. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 11. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 12. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Creating an objective comparison: Margin Percentiles & Graphs
- 13. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 14. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 15. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 16. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Current Margin Percentiles
- 17. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 18. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 19. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Strategy Selection
- 20. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Review Contracting Alternatives Physical Market: – What suppliers are available? (approved counterparties authorized to transact with for specific commodity) – What types of agreements will they offer? (how much flexibility is available in a cash contract) Futures Market: – What trading authorization do I have? (what types of contracts can I use and how far out in time) – Is there any restriction on what types of strategy combinations I can employ? (margin exposure, etc.) – What flexibility do I have in making adjustments to my position over time? (any restrictions in hedge policy)
- 21. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Physical Contracts Advantages And Disadvantages • Advantages – Supplier managed – Potentially some alternatives – No out of pocket expense • Disadvantages – Locked-in to a specific supplier – Pricing may not be transparent – Counter-party risk – Limited flexibility for adjustments
- 22. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Exchange-Traded Contracts Advantages And Disadvantages • Advantages – Lots of alternatives – Added flexibility and liquidity – Reduced counterparty risk • Disadvantages – Time commitment, have to manage – Potential margin exposure, CF management – Basis risk
- 23. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com • Strategy Considerations – What do prices normally do this time of year? – How much flexibility do I need? – How much cost can I afford? – Is option cost high (low) seasonally or historically? – Are there effective combinations available to reduce cost and retain protection/flexibility? – Can I offset cost over time? – What is the greatest risk to my physical position?
- 24. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 25. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com • December hog strategy selection example • Sell futures • (delta=100) • Buy a 70 put and sell a 80 call at $1.80 • (delta=70) • Buy a 72 put, sell a 62 put and sell a 82 call at $1.90 • (delta=50)
- 26. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com CIH Strategy Guide Coverage 3rd Quarter 2010 – 100% 4th Quarter 2010 – 100% 1st Quarter 2011 – 75% 2nd Quarter 2011 – 50% 3rd Quarter 2011 – 0%
- 27. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Recap: Before you start managing forward price risk establish a hedge policy to state your goals and methods ahead of time. Be objective. Model your operation to identify forward margin opportunities. Choose the best strategy that fits your operation. The most important step - Implement your plan!
- 28. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC 1-800-241-5498 www.cihedging.com www.hogmargin.com There is a risk of loss in futures trading. The information contained in this publication is taken from sources believed to be reliable, but is not guaranteed by Commodity & Ingredient Hedging, LLC, nor any affiliates, as to accuracy or completeness, and is intended for purposes of information and education only. Nothing therein should be considered as a trading recommendation by Commodity & Ingredient Hedging, LLC. The rules and regulations of the individual exchanges should be consulted as the authoritative source on all contract specifications and regulations. There is a risk of loss in all futures and options trading. Past performance is not indicative of future results. The strategies outlined in this publication were built using several assumptions, including, but not limited to price, basis, and volatility. Therefore, as each assumption changes, the strategy, and its results, will vary. Further, this strategy is not a prediction, nor should it be interpreted as a prediction to which direction the market will move.
- 29. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Additional Resources & Studies
- 30. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 31. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 32. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com
- 33. Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com Commodity & Ingredient Hedging, LLC Risk Management Alternatives www.cihedging.com