Risk Management in Agricultural Product Marketing

Risk Management in Agricultural Product Marketing Presentation Risk Management Marketing of agricultural products deserves special attention because effective marketing of agricultural products depends largely on the prevalence of an environment conducive to smooth bargaining among market participants. Hedging ❑ Hedging is a mechanism implemented on the Futures Exchange by opening a buy or sell contract on a commodity that is the same as the commodity to be traded on the physical market. ❑ Hedging aims to minimize or eliminate the risk of losses on price uncertainty that may occur during transactions in the physical market later,. So by hedging the losses incurred will be covered by the profits earned on transactions carried out on the futures exchange. ❑ Futures markets are one of the most common pricing mechanisms for agricultural products, especially in developed countries. ❑ Future market function: - Efforts to avoid the risk of price changes or movements - Opportunity for future price speculation 2. Risk Management in Agricultural Product Marketing Cont... Hedging ❑ These hedgers are commonly called hedgers, which consist of buyer hedgers (long hedge) and seller hedger (short hedge). • Hedger Buyers generally plan to buy commodities in the physical market in the future to protect their transactions from fluctuations. Hedger buyers are usually exporters, processors, raw material users such as factories, and so on. • A seller hedger or hedge short is a hedger who will sell a particular commodity in the physical market in the future. To protect the selling price of the commodity, the hedger will open a futures contract now with a short position. Selling hedge is usually done by producers, especially farmers, with the aim of protecting against a possible decline in commodity prices at harvest time. 2. Risk Management in Agricultural Product Marketing Cont... Hedging Marketing of agricultural products deserves special attention because effective marketing of agricultural products depends largely on the prevalence of an environment conducive to smooth bargaining among market participants. ❑ Commodity exchanges are also a form of hedging to ensure a secure supply of commodities needed by one producer to another. ❑ Hedging is also a way to ensure the availability of a product in the future at a price that has been set from now to protect sellers and buyers from the risk of scarcity or oversupply that can make prices fluctuate. ❑ Many parties can actually benefit from this hedging transaction, namely commodity producers, farmers, entrepreneurs, consumers, investors, as well as futures exchanges and futures brokers if this type of transaction is intensified. ❑ Indonesia itself as one of the main commodity countries in the world has the potential to further develop the futures market with one of the benefits of hedging commodity price fluctuations. 2. Risk Management in Agricultural Product Marketing Cont... ❑ Warehouse receipt or in foreign languages called warehouse receipt is a document t h a t proves ownership of goods stored in a specially registered warehouse issued by the warehouse manager. Purpose of Warehouse Receipt: Can be an alternative solution in order to stabilize prices and maintain agricultural commodity stocks. Farmers can delay the time of sale and wait for the right moment to sell. get a better price Can be a source of agricultural financing As proof of commodity ownership or as collateral to obtain credit from banks and non-banks 2. Risk Management in Agricultural Product Marketing Cont... ❑ The warehouse receipt system can be a solution to the national food problem. Price stabilization can also be maintained through the warehouse receipt system (SRG), where there will be certainty of the quantity and quality of stored commodities. Agricultural businesses (farmers) will also get several benefits, such as low-interest financing, encouraging business groups, and improving farmers' bargaining position. ❑ Supervision of the Warehouse Receipt System (SRG) by the Commodity Futures Trading Supervisory Agency (Bappebti). In the future, the SRG will be more compatible with commodity futures trading, which characterizes industrialized countries. 2. Risk Management in Agricultural Product Marketing Cont... ❑Standardization is the process of determining standards or a measure of quality by taking basic details such as color, appearance, chemical content, strength, maturity, water content, aroma taste, cleanliness and damage. ❑Standardization aims to create uniformity of goods in the process of exchange from one place to another over time. ❑Grading is the process of using standards by sorting objects or goods into groups. 2. Risk Management in Agricultural Product Marketing Cont... ❑ Example of Standardization and Grading For example, in rice products (determined by the National BULOG) ie: For grades IA, IB and IC should be 1/1 (full white) slip with highest percentage of broken rice respectively: 25%, 30%, and 35%. For grades IIA, IIB, and IIC it should be with ¾ slip and with the highest broken respectively: 25%, 30%, and 35%. ❑ Standardization and Grading Process Standardizati on Standard Usage/Sorting (Grading) Labeling Convenience for Consumers 2. Risk Management in Agricultural Product Marketing Cont... ❑ Benefits of Standardization and Grading for manufacturers: - get a guarantee of getting a price that is in accordance with the quality of their products (get a competitive price) - It is also used for futures markets (standardization is one of the most important terms of the futures market) For consumers: obtaining goods according to their desires and income levels. 2. Risk Management in Agricultural Product Marketing Cont... Asuransi Perting The Importance of Agricultural Insurance Business Financing Protection Protect farmers/farmers financially against losses due to crop failure Bargaining Position and Access to Finance Improving the position of farmers in the eyes of financing institutions to obtain farmer credit, Maintaining the Sustainability of Agricultural Businesses Maintain farmers' income when there is a loss due to crop failure, so that farmers can continue farming activities / livestock business Increase Production and Productivity Increase production and productivity of the food and livestock agriculture sector by following good cultivation procedures as a prerequisite for participating in agricultural insurance. Thank You!