Managing Price Risk on Canadian Farms
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Agriculture commodity prices have experienced increased price volatility in recent years. This can be attributed in part to irregular weather events, increasing demand from developing countries for agricultural and food products and increased interest from non-commercial investment funds (speculators). This volatility in the agricultural commodity prices may result in a potential loss of revenue for the farmers, making their cash flows more risky. Volatility in the currency exchange rate is another contributor to farm price risk as the commodities in international markets are traded in U.S. dollars. If this price volatility is not properly managed it can result in loss of income and ultimately negative cash flows for larger operations. This paper strives to develop a risk management program (RMP) that can be used by producers to mitigate much of the price risk. The RMP provides price forecasts, using a combination of technical analysis that is based on market trends, and fundamental analysis that is based on the laws of demand and supply. Given the forecasted prices, the RMP will then recommend market timing strategies to optimize revenues. This means, rather than selling all the harvest together at one time, the producers would spread out the sale over different periods. The RMP forecasted trends would dictate what portion of the harvest would be sold in each period. The RMP further recommends hedging (risk reduction) strategies using futures and option contracts that are traded on commodity exchanges.