RISK MANAGEMENT IN AGRICULTURE AND NATURAL RESOURCES

• Sponsoring Institution: National Institute of Food and Agriculture
• Project Status: COMPLETE
• Funding Source: HATCH
• Reporting Frequency: Annual
• Accession No.: 0189858
• Project Start Date: Jul 1, 2001
• Project End Date: Jun 30, 2004
• Program Code: [(N/A)]- (N/A)

Recipient Organization
NEW MEXICO STATE UNIVERSITY
1620 STANDLEY DR ACADEMIC RESH A RM 110
LAS CRUCES,NM 88003-1239

Performing Department
AGRI ECONOMICS & AGRIBUSINESS

Non Technical Summary
Utilities and financial institutions face new market risks and need price risk management tools. Increasingly, both agricultural producers and agribusinesses must rely on more sophisticated derivatives to manage the complex world of food and natural resource management.

Animal Health Component

50%

Research Effort Categories

Basic

50%

Applied

50%

Developmental

(N/A)

Classification

Knowledge Area (KA)	Subject of Investigation (SOI)	Field of Science (FOS)	Percent
603	6110	3010	100%

Knowledge Area
603 - Market Economics;

Subject Of Investigation
6110 - Economy of the United States and sectors thereof;

Field Of Science
3010 - Economics;

Keywords

risk management

natural resources

agriculture

agricultural economics

agribusiness

economic analysis

income

energy industry

financial markets

derivatives

information collection

performance testing

comparative analysis

returns

Goals / Objectives
1) Analyze how the energy, financial and agribusiness industries manage the risk of price and income changes; 2) Develop strategies for comprehensive income risk management using various derivative instruments.

Project Methods
Objective 1: Survey utilities, financial institutions, energy producers and agribusinesses to gather information on how they currently manage the risk of income changes. Objective 2: Create various risk management derivatives and test them against historical price and income movements for each industry to determine which derivative preformed the best using a typical return/risk profile.

Progress 07/01/01 to 06/30/04

Outputs
Case studies of business use/non-use of price risks helps students as well as businesses learn the tools of price risk management. Data currently are being collected to cross hedge various NM products that do not have futures or options contracts.

Impacts
Price risk reduction improves business stability and profitability. Currently, no more than 5% of N.M. farms and ranches use price risk tools. If the number doubled to 10%, an additional $7 million dollars of net farm income would be generated and at least 70 farms and ranches would be saved from bankruptcy.

Publications

• Catlett, L. 2004. Needs, Wants, and Concerns of the Future Consumer. International Food Conference: Thinking Beyond Tomorrow, University of Dublin, Proceedings.

Progress 01/01/03 to 12/31/03

Outputs
Case studies of businesses that use price risk management tools (futures, options, and swaps) are being developed as a teaching aid for classroom students as well as examples for businesses to use as guides for their own businesses. Basis tables provide useful data to contract hedges.

Impacts
Price risk reduction improves business stability and profitability. Currently, no more than 5% of N.M. farms and ranches use price risk tools. If the number doubled to 10%, an additional $7 million dollars of net farm income would be generated and at least 70 farms and ranches would be saved from bankruptcy.

Publications

• No publications reported this period

Progress 01/01/02 to 12/31/02

Outputs
A complete review of the literature on price risk management was completed and cataloged, specifically on the current state of research on what risk really is and how risk is measured both by academic researchers and businesses. Portfolio Theory is being applied to a model farm in New Mexico on the appropriate level of profit allocation to horizontal type activities versus vertical activities to maximize long run returns.

Impacts
The inability to properly manage price risks costs New Mexico agriculture approximately 100 million dollars a year and the oil and gas industry approximately one billion dollars a years. Additionally, many firms have to exit the agriculture and oil and gas industries each year because of adverse price movements. The ability to manage price risks could save approximately 300 businesses from filing for bankruptcy and/or exiting the agriculture and oil and gas industries each year.

Publications

• No publications reported this period

Progress 01/01/01 to 12/31/01

Outputs
Best practices on financial risk management information from several financial management firms, utilities, energy suppliers and agricultural producers was gathered. Workshops were conducted for seven financial management firms, one energy supplier and three agribusinesses incorporating the best practices for risk management using futures, options and swaps. Fifteen feedlots in Texas, New Mexico and Arizona were contacted and agreed to participate in a study of their labor practices as they relate to operational risk of the cattle feeding business. This study will be completed in 2002.

Impacts
(N/A)

Publications

• No publications reported this period