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Food firms hedge costs.

Under mounting pressure from surging commodity prices, makers of the name-brand foods that fill the nation's grocery shelves are fighting back on several fronts, deploying an arsenal that includes raising prices, shutting down factories and shedding less-profitable brands. But one of the most effective weapons used to defend their bottom lines--and one they rarely discuss in public--involves placing big bets in the grains market, a strategy known as hedging.

Food makers use hedges to protect against sudden price moves, smoothing out some of the peaks and valleys in the commodities market by managing risk through futures and options. This gives them a better idea what costs they are likely to encounter in the months ahead, crucial to budget planning. And if they place their bets well, they can turn a profit from futures and options trading.

Food makers are facing unprecedented costs for their ingredients. USDA forecasts average prices for wheat, corn and soybean meal will continue to hover well above their 10-year averages through 2008, bloating their share of corporate budgets.

Food makers have for decades hedged their exposure to price volatility in the grain market. The basic strategy calls for entering into long-term forward contracts for physical delivery with big grain suppliers such as Minneapolis-based Cargill Inc. or Archer-Daniels-Midland Co., of Decatur, Ill. To protect against price fluctuations, a food company will buy a futures or options contract.

It has become dicier these days to pinpoint the costs of grains and other commodities. Companies are revising commodity-cost projections practically every quarter as they watch contract values for grains surge on exchanges in Chicago, Minneapolis and Kansas City.
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Publication:Food & Drink Weekly
Date:Mar 31, 2008
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