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Commodities Marketing - Essay Example

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Risk Management: Commodities Marketing Name: Tutor: Course: Institution: Date: Introduction Risk management is always very necessary for almost any business. There are a number of risks that need to be managed in order to cushion the business from future uncertainties…
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Commodities Marketing
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Commodities Marketing

Download file to see previous pages... Commodity products such as metals, fuel, and agricultural products have a much higher risk in this regard (Damodaran 2008). This is why any manager running an agricultural business should be able to manage these risk in order to help he business to navigate all the seasons in a year without being brought done by the changing prices. Nature of risks for an agriculture business The kind of risk that an agribusiness faces is not just tied to the prices of the commodity it sells. It is also related to the price changes in the farm inputs (Damodaran 2008). If the farm inputs increase in price in a dramatically short time, the business will have to receive this shock and may not be able to sell its products at a price that will return its costs of production and give the business a profit margin. One thing that is most necessary to understand about agriculture products is that they have at least two main characteristic that expose them to the risk of price change. These are as follows; Affected by weather and seasons The seasonal nature of agricultural commodities is something that affects the way the products navigate through the market during the calendar year. For instance, during the time when there are too many tomatoes in the market, prices of the tomatoes will go down and this can affect the farmer because the famer (agribusiness man) may not be able to recover their cost of production. ...
If the farmer is farming vegetables and fruits, the farmer can use green houses and be able to deliver the goods to the market during the time those particular goods are out of the season and thus be able to have an upper hand in demand and supply equation. There are on the other hand various issues in regard to this. To begin with, not all the agribusiness products can be cushioned from risk in this way. Secondly, even for those products which can be headed in this way, they would still need more hedging because this does not guarantee that the markets will be stable. This therefore means that the farmer may still need to hedge their business farther using more formidable means of risk management tools. Perishable goods Most agricultural goods are perishable and therefore have no long shelf life in which to wait for the products to wait for the price shock to pass. For instance, once vegetables reach their time to be harvested, they have to be harvested as soon as possible, or they will go bad. At the same time, once they are harvested, they have to be moved immediately before they expire. This leaves the farmer at a disadvantage and may make them to be vulnerable to the forces of demand and supply. Substitute products To add to the risk of the perish-ability, most of the agricultural goods have substitute products in the market and agricultural products can be replaced by so many other products. This leaves the consumers with a choice to choose the substitute product with the lowest price tag on it. From the side of the farmer, though this is not ideal because it leaves the farmer in a position where they are not able to negotiate for a better price. This makes ...Download file to see next pagesRead More
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