Commodity Marketing and Risk Management Essay Example | Topics and Well Written Essays - 1000 words

Commodity Marketing and Risk Management - Essay Example Market risk. Of all the risk that deserves regular tracking by management, the market risk may be one of the most important. The market can change and no organization is immune to the ebbs and flows the marketplace. Market risk includes the risk of not having a viable market for the product or commodity. For example, if a producer grows his crop without a contract, he faces the risk of not having a market for the crop. Contract. Contract risk is the risk of contact default by the producer or the contractor. Several component contract risks are contract default, contract termination, not understanding contract terms, product contract violators and payment risk. If the contractor is unable to pay, it may leave the producer in the position of an unsecured creditor. Terminator of a contract can also generate serious losses. This is especially true when the producer has incurred high production expenses. Where bailment contracts or personal service contracts are used, the conditions for terminating by the contractor can be viewed as a risk factor. Investment. Investment risk is the risk associated with returns on a long-term asset. There are two main components of investment risk: variability in returns and loss of the asset. Variability in returns is the result of an annual change in the costs of revenue associated with the asset. Loss of the asset may be a result of the fire, or other peril, and is often covered by property insurance. Yield risk is simply the risk of lower than expected production. ... If the contractor is unable to pay, it may leave the producer in the position of unsecured creditor. Terminator of a contract can also generate serious losses. This is especially true when the producer has incurred high production expenses. Where bailment contracts or personal service contracts are used, the conditions for terminating by the contractor can be viewed as a risk factor. Financial Risk Investment. Investment risk is the risk associated with returns on a long-term asset. There are two main components of investment risk : variability in returns and loss of the asset. Variability in returns is the result of annual change in the costs of revenue associated with the asset. Loss of the asset may be a result of fire, or other peril, and is often covered by property insurance. Production Risk Yield risk is simply the risk of lower than expected production. For example, a farmer's produce is affected by factors such as weather, variety risk, unknown yield crop and pest pressure. Relationship Risk Relationship risk is the risk of adversely affecting relationship with buyers, supplies or other resource providers that are critical to the success of the operation several sources of relationship risk are: Landlord - access to land Lender - access to capital Supplier - access to critical supplies including genetics, production technology and knowledge. Buyer processor - access to markets, revenue opportunities, and market knowledge. Marketing Strategies to Avoid the Risk The best way to manage risk is by developing a strategic plan using the full range of risk management tools available. Some of the known risk management strategies are: Product Diversification One of the most important tasks a marketer