Hedging to minimise big risk

Hedging to minimise big risk


Analysis
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PRICE is not necessarily the most important factor to a successful farming business, managing margin is, according to Southern Aurora Markets partner Michael Avery.

PRICE is not necessarily the most important factor to a successful farming business, managing margin is, according to Southern Aurora Markets partner Michael Avery.

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RISK MANAGEMENT: Southern Aurora Markets partner Michael Avery told woolgrowers recently that hedging is a price risk management strategy designed to minimise exposure to market risk.

RISK MANAGEMENT: Southern Aurora Markets partner Michael Avery told woolgrowers recently that hedging is a price risk management strategy designed to minimise exposure to market risk.

Presenting at a woolgrowers evening in Goornong recently, Mr Avery said managing margins can be a difficult process, given the volatility of the wool industry.

“Such volatility makes forecasting, budgeting, and cash-flow management difficult, which affects how the business is perceived, and its long-term sustainability,” Mr Avery said.

He said hedging is a price risk management strategy designed to minimise exposure to market risk associated with changes in supply, demand and price.

“Hedging products, such as wool forwards, needs to be simple to understand, and versatile in their application,” he said.

“The intended outcome should be the reduction of risk, and increase in the stability and the predictability of the financial results.”

He said companies like Riemann Wool offer risk management products to the wool industry.

“Riemann Wool Over the Counter (OTC) Forwards are cash-settled against the Australian Wool Exchange’s nominated Micron Price Guides,” he said.

“The contract is a wholesale business to business product, where the wool brokers, on behalf of their clients, execute the trade directly with the exporter or processor.

”There are no margin requirements as each party takes the other’s credit risk, and maturity dates are flexible to coincide with the anticipated sale of the grower’s clip.”

The value of certainty is more important than the fear of lost opportunity. - Michael Avery, Southern Aurora Markets

Mr Avery said with current wool prices at record high levels, it is timely for woolgrowers to consider strategies like this to mitigate some of the risk.

“Strategies relate to both timing and price, and as an example, some growers set price targets based on a margin related to their cost of production, and will look to hedge a percentage of their clip as those targets are reached,” he said.

“Others will set stricter time targets looking to cover a percentage of the year’s clip by set times, as they approach the next shearing.

“Whatever strategy is employed, a grower needs to take ownership of the decision, remembering the value of certainty is more important than the fear of lost opportunity.”

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