“Trust but verify” is a Russian proverb Ronald Reagan made famous, but risk managers, CFO’s and grain company lenders live by it today.
When it comes to price volatility the biggest risk grain businesses face is not being hedged properly. This 6 step process will help you to spot check your futures and grain positions to ensure you are not taking on unintentional price risk.
1. Make sure the futures statement and grain hedge position report are from the close of the same day.
2. The futures statement is an independent source of information that needs to be verified first to eliminate all the paper off your desk. Add up all the open futures and options positions and verify the numbers on your grain hedge position report.
3. Make sure your net position open to price risk is within your company’s grain hedging policy limits.
4. Accumulate the total old crop long and short grain positions and verify the appropriate old crop futures positions. Keep in mind that the best merchandisers pre-spread futures positions to protect the grain margins.
5. Match up the net new crop grain positions with the appropriate year futures positions to eliminate the risk of multiyear spreads.
6. Stress test the net futures position to ensure margin call capacity.
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