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What is Profit Margin Hedging?

  • This price risk management strategy for crop farmers suggests selling some of your  crop when the current futures price (adjusted for basis risk and commissions) is higher than your crop marketing plan’s lowest net profit goal.
  • CropsProfit calculates your net profit based on the live market price by taking your variables like break-even cost, harvest yield and profit goals into account.It means that a crop marketing (hedging) decision is based on a farm's unique circumstances and appetite for risk. Helping you to address your unique challenges is a very important approach to help solve your problems on your farm.
  • In the literature profit-margin hedging is defined as a simultaneous hedging of inputs and outputs of a production process” [1, p.379] 
  • A study on choosing the timing of crop sales found that profit margin hedging was shown to be an optimal strategy even in an efficient market. The simulation results also showed that the expected utility of profit margin hedging strategy was highest. [2
  • Even outside the discipline of crop marketing a five year study on profit margin hedging amongst New Zealand dairy farms found that the representative farm’s payout for this strategy is statistically higher than the continuous hedging and no hedging strategies. [3
  • From now on, when you look at your season’s crop marketing plans you will better understand that it is about helping you personally to be more profitable by addressing your unique circumstances on your farm. 

1. Kee, D., & Kenyon, D. E. (1999). Hog Profit Margin Hedging: A Long-Term Out-of-Sample Evaluation, Paper presented at NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Chicago, IL. Retrieved from http://www.farmdoc.uiuc.edu/nccc134

2. Kim, H.S., Browser, B.W., Anderson, K.B., (2007) Profit Margin Hedging, Paper presented at NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Chicago, Illinois, April 16-17, Retrieved from https://legacy.farmdoc.illinois.edu/nccc134/conf_2007/pdf/confp14-07.pdf

3. Fernandez-Perez, A.,Frijns, B., Gafiatullina, I., & Tourani-Rad, A. (2021). Profit margin hedging in the New Zealand dairy farming industry, Elsevier: Journal of Commodity Markets, Available online 26 May 2021, 100197, https://doi.org/10.1016/j.jcomm.2021.100197