Understanding the Risk Management Puzzle
If you are in the commodities space right now, you know the pressures facing producers and consumers. From the trade war and African Swine Fever to the decline in protein supplies, trying to manage your risk in the commodities space can feel like a putting together a puzzle with a missing piece. In addition, the emphasis on Alternative Marketing Agreements makes finding the perfect hedge a challenge for producers.
What are the puzzle pieces you need to put together for a solid risk management strategy?
#1: Understand your exposure and what’s driving current prices
What puzzle pieces do you need to pay attention to in order to meet your objectives? Here are a few examples of commodities that might be on your list along with some of the factors that could be affecting them.

#2: Understand how to protect your margin
Producers are forced to manage price risk by accepting an imperfect correlation and utilize a variety of futures and options strategies to protect margins.
#3: Know your cost of goods
For end users, hedge accounting rules can often limit a company’s ability to protect itself, unless it finds a perfect connection to the specific meat cuts they buy. This approach can be extremely expensive if it’s done in the physical supply agreement, or there may not be risk management solutions that address the specific needs that company has.
#4: The missing piece – managing the risk on the first three points
Whether you are a producer or consumer, exposure in hogs and other meats can be challenging, but like any other commodity space, the key to putting the pieces of the puzzle together is having a good risk management strategy in the first place.
Learn more about how to develop an effective hedging and risk management program in our 8-step checklist. When you understand the pieces, you have more ability to objectively assess your business needs and apply strategies that will help you effectively manage your risk.
Once you have a program in place, think about how you can apply the DDC approach. (This is a quick overview of a longer article – find more details on the DDC approach here.)
- Diversification – use a variety of strategies to help you benefit from the variety of paths the market may take.
- Discipline – execute your plan rather than waiting and hoping your target will eventually come into sight. This means you have to stay focused on your objectives and make decisions based on the current market versus past positions. Set your plan and stick to it!
- Controls – put a series of controls in place to ensure deliverables are executed. This might include reporting, stress testing, oversight and regular dashboards.
When it comes to your exposure in hogs or other meats, Cargill Risk Management can be part of the solution:
- Offering an over-the-counter (OTC) marketplace for meats
- Supporting new contracts, like the pork belly contract that is reemerging (more to come in a future article)
- Creating liquidity for buyers and sellers
Cargill Risk Management is at the cutting edge when it comes to finding specialized solutions for customers. With our ability to work through the physical side of the business within Cargill, we can help you find a comprehensive solution to manage your risk.
These materials have been prepared by personnel in the Sales and Trading Departments of Cargill Risk Management, a business unit of Cargill, Incorporated based on publicly available sources, and is not the product of any Research Department. These materials are not research reports and are not intended as such. These materials are for the general information of our customers and are a “solicitation” only as that term is used within CFTC Rules 1.71 and 23.605, as promulgated under the U.S. Commodity Exchange Act. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any swap, security or other financial instrument. These materials contain preliminary information that is subject to change and that is not intended to be complete or to constitute all of the information necessary to evaluate the consequences of entering into a swap transaction and/ or investing in any securities or other financial instruments described herein. These materials also include information obtained from sources believed to be reliable, but Cargill Risk Management does not warrant their completeness or accuracy. In no event shall Cargill Risk Management be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained in these materials and such information may not be relied upon by you in evaluating the merits of participating in any transaction. All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions. Actual results will vary, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice. Cargill Risk Management is a provisionally registered Swap Dealer and operates under “Order of Limited Purpose Designations for Cargill, Incorporated and an Affiliate.”