Why Farmers Should Have a Hedging Strategy

Farmers, policy makers and institutional and private investors alike with association with agribusinesses and agriculture in general, within Africa and otherwise are very much familiar with the constant challenges that creates uncertainties with the markets and crops every season. To mitigate and minimize such risk and help ease the stress associated with it, professionals within the field of agriculture should consider putting together a hedging strategy in order cope. The focus of this article will be to suggest ways to create an effective hedging strategy.

Prepare Against an Insufficient Harvest Season:

Similar to how a strong harvest can lower prices, a weak harvest can have severe influence on the profits of a farm production. A solid relative plan can allow farmers to adjust to costs regardless of which direction the markets goes.

An overly dry or wet season can have severe impact on the harvest yield causing supply and profits to reduce. Not only can the harvest yield be impacted by harsh weather conditions, but a wet season can cause pests to become uncontrollable, further reducing harvest yield. With so many factors influencing profits, the need to develop and execute a strong hedging strategy proves even more important to a farm’s health.

Prepare Against a Surplus Harvest:

In order to prepare well and stay ahead, analysis suggest that one of perhaps many ways of hedging to make profits more consistent is by creating a competitive pricing strategy, depending on which strategy is chosen. For instance; experts may well be predicting a bountiful harvest, farmers will want to brace themselves for smaller profits due to the expected surplus of crops by curbing profitable prices for the future. To give an example, if a farmer can profit on grains like rice by selling 4,000 kilos at $15 for argument sake, then they will want to ensure that a future price above that to offset the expected reduction in prices and to lower risk. This gives farmers the opportunity to earn a profit even when they are faced with price deflations.

Hedging Animal Farming:

The effects of a weak and strong growing season for crops can also diverse into the livestock industry (i.e.: Cow), as the price of grains considering it’s a weak harvest the prices of corn, rice, and grain produce will rise, which will increase the costs of raising livestock. While it is possible that there is a chance prices are likely to increase or decrease, the benefit of hedging is to increase the chances of recuperating profits and reducing losses at the end of the season to remain prepared for the next season.

To conclude; the prices of crops and livestock are in a constant state of fluctuation based on perceived and or actual changes relating to the supply or demand trajectory of the market. Due to the ever-changing prices, farmers and other market players must frequently analyse their risk exposure and adjust their strategies to cope with the market demands. Creating and implementing a tailored-to-fit type of strategy is a sustainable way for farmers and other players to maintain price competitiveness during overly high price periods to reduce risk and uncertainty, whilst trying to secure profits at the end of the season. For more shared discussion points around Agribusiness developments, click here: https://www.agriqueafrica.com/ .