Minimizing Risks for Produce Buyers Essay

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Thomas Foods -- Hedging Strategies

If Thomas Foods expects to protect itself against suddenly rising prices that farmers charge for their produce -- due to crop failures, inclement weather, or other unexpected events -- then Thomas Foods needs to engage in some form of a hedging strategy. There are a number of ways to do this, and this paper will point to several strategies and models that might work for Thomas Foods. At a minimum, the comptroller at Thomas Foods should be knowledgeable about ways to protect his company from suddenly skyrocketing produce prices

What are "futures"? The available literature on ways to protect a company like Thomas Foods from suddenly being stuck with prices from farmers that are well above what was understood at the outset of the contract -- is to buy futures. A future is a financial deal signed as a contract that obligates the "…buyer to purchase an asset (or the seller to sell an asset)" such as produce from farmers at a "predetermined future date and price," according to investopedia.com. For example, say a farmer is producing corn; that farmer could use futures to "lock in a certain price" for his corn, and hence reduce the risk, or hedge the risk against falling prices when the harvest is ready (investopedia.

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com). Thomas Foods could also buy futures to lock in the price it pays the farmer for corn.

What are "options"? In many cases, options pertain to the stock market; an investor engages in a securities contract, a "call" or a "put" that gives the investor the right to either buy ("call") or sell ("put") an asset (or an equity) at a "predetermined price" (called the "strike price") at a predetermined window of time (with an understood "expiration date") (investorplace.com). The "calls" offer the buyer (in this case, Thomas Foods) the right, "but not the obligation," to buy a product or asset at a specified price in a certain window of time (investorplace.com). On the other hand, the "puts" offer the purchaser the right (but again, not the obligation) to sell a product or asset. The "put" would be on the farmer's end; the "call" would be done by Thomas Foods.

What is a "forward contract"? This is a private contract between say, Thomas Foods and a farmer; Thomas Foods agrees to buy and the farmer agrees to sell a "specific quantity" of produce at a price indicated in the contract (finweb.com). For example, before….....

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