risk management, hedging, options market
Some risk can be transferred to someone else, some may have to be retained by the producer. Price risk is one type of risk which can be shifted to someone else. The cash market method of pricing keeps the risk in the hands of the producer. Often, that means that risk is not managed, just accepted as part of doing business. The forward pricing techniques--cash forward pricing, futures market and options--offer some opportunity to manage price risk by shifting some of that risk to someone else. Merely shifting price risk to someone else doesn't necessarily mean either more profits or even prudent management of that risk. Each producer must evaluate his or her own situation and decide how much price risk they can afford and want to keep and how much they want to "get rid of". Then, they must decide how best to do that given their own situation, including their ability to use the techniques available. Remember, incorrect use actually could increase price risk. The key is to "manage the risk" you keep and shift, not necessarily to either keep it all or shift it all to someone else.
Number of Pages
South Dakota State University
Copyright © 1986 South Dakota State University
Murra, Gene, "Risk Management and Marketing" (1986). South Dakota Beef Report, 1986. 35.