'Business hedge' to help control operation risks

August 14, 2008 07:00 PM
 

There are many opportunities to hedge your crop or livestock production.
Aside from locking in interest rates, rarely does an opportunity exist
where you can hedge risk on your entire farm operation
.
 

But that opportunity may be presenting itself in the currency markets. Since mid-July, there has been a dramatic shift in the relationship between the U.S. dollar and the euro. The dollar is strongly indicating a major low has been posted, while the euro is signaling a major top has been struck.
 

Foreign exchange rates, especially when there are major shifts, greatly impact agriculture -- and therefore, your bottom line. As a result, it's time to consider hedging the impact a bottoming dollar (topping euro) could have on your operation.
 

Don't do anything crazy, but selling one euro contract is a good hedge against negative impacts a rising dollar could have both short- and long-term. If you are nervous about selling euros on the FOREX market, use
a much more stabile (and regulated) CME Euro FX futures contract.
 

What are potential pitfalls to watch for on this hedge? 1) A change in stance by the European Central Bank where they would start raising interest rates again; or 2) A move by the Fed to cut U.S. interest rates after the pause. Either would potentially deflate the dollar and inflate the euro.
 

 

Drop me an email at bgrete@profarmer.com and your marketing questions will be answered.

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