Agricultural Supply Chains and the Challenge of Price Risk - 9780415827003

This book discusses the issues of integration within food and fibre supply chains and the challenges of price risk. Integration and price risk are interwoven in agricultural supply chains through the problems of production risk and hoarding. Without integration through commercial trade markets there can be no forward market upon which forward transactions and the management of price risk can be based. Without a forward market that can reduce opportunistic behaviour, there is likely to be little security of supply, particularly under high production risk and price uncertainty.

Whilst price risk management is possible under certain circumstances, there are many factors that can prevent or cause forward markets to collapse, thus undermining the ability to manage price risk within acceptable risk and return parameters. Market positions therefore need to be valued and often daily settled because of the risk of contract default. The issue of currency risk and associated management applies to international market positions and transactional exposures.

The book analyses a range of price risk management strategies from forward contracting through to futures and options hedging, and finally to bank over-the-counter products. Evaluation techniques are developed to aid in decision making. The author concludes that forward market development is the exception rather than the norm, and that whilst favourable price risk management outcomes may sometimes be possible, they may be caused more by luck rather than through good management. It is shown how tactics are an important consideration in decision making to minimize costs and losses.