Hedging Basics
What is Hedging?
Hedging is establishing a price, or range of prices, for a commodity that you expect to purchase or sell sometime in the future.
You’re already establishing prices, but are you optimizing your profit margin?
In your ordinary course of business, you are establishing prices by buying inputs such as feed, and selling outputs such as milk. Hedging brings two powerful advantages to your business. First, proper hedging can help smooth profit margins so that income is more stable over time, and secondly, hedging allows you to select when and how to price the inputs and outputs. Hedging, for purposes of pricing, helps you proactively be in charge of your business and expected profit margins.
What are the benefits of hedging?
1. You can focus on your business profit margins
Ag Hedge Desk brings its depth of knowledge and experience to help you provide durable, efficient and innovative hedging solutions. We pull from our experience as a designated market maker in agricultural markets to find optimal hedging strategies for you.
2. You can reduce risk and take advantage of market opportunities
Ag Hedge Desk is looking forward and calculating business profit margins daily so you get a good picture of risk and opportunities. When you see profit margins that fit your business objectives you can select and implement hedging strategies.
3. You can lower capital requirements and transaction costs compared to alternative hedging strategies
Ag Hedge Desk offers capital and cost efficient strategies and we can pass on the benefit of our low trading costs and efficient market access to you.
What does Ag Hedge Desk Offer?
Ag Hedge Desk offers a range comprehensive dairy hedging programs for dairy producers to best manage risk and maximize profits. The two main programs are Revenue Over Feed and the Horizon Pricing Program.
Revenue Over Feed (ROF) is a simple, innovative approach to hedging business profit margins. These programs are offered by Ag Hedge Desk to help producers manage their business more efficiently.
The main driver of profit margins for producers is the spread between the cost of commodity inputs and the price of outputs. Revenue Over Feed is a hedge for both commodity inputs and outputs. This approach of looking at the profit margin and hedging input costs and output prices helps puts the producer in the driver’s seat to focus on managing the business. The ROF programs are intended to help establish favorable profit margins and minimize the commodity price risk thereby decreasing the most volatile aspects of production.
The ROF program can be used opportunistically to take advantage of favorable profit margins and can help decrease commodity price volatility that can adversely affect profit margins.
The formulas below show the ROF and ROFL equations.
| Commodity | Formula |
| Dairy ROF | Milk Price per hundred weight – Corn Price per bushel – (Soybean meal price per ton)*.01 |
| Dairy ROF FeedLite | Milk Price per hundred weight – (Soybean meal price per ton)*.01 |
Horizon Pricing Program is similar to ROF, but removes the need to pick the day of trade, allowing Ag Hedge Desk to dynamically hedge for producers instead. Ag Hedge Desk uses the most successful strategies we’ve gathered from ROF with Horizon Hedging and update producers on performance on a monthly basis.
For more information, check out he Horizon Pricing and Revenue Over Feed pages respectively.