Risk Management Challenges In The Grain Processing Industry

Grain processors face price risk management issues that are slightly different from the traditional hedging objectives. This study examines two aspects of the problem. The first is the industry-specific correlation between input and output prices. These could be rather firmly correlated in certain occasions and significantly less in other circumstances. The second is the hedge horizon, or the timespan ahead that a company must offset its impending short cash positions. The processing margins could be effectively hedged when there is a presence of strong correlation between input and output prices. Hedging strategies, however, might be impinged if the correlation is weak and/or if the hedge horizon period is longer. The purpose of the report is to highlight the key factors that grain processor must take into consideration when shaping their risk management approach.