A risk-return simulation model of commodity market hedging strategies

The American food processing industry is characterized by a vast array of products, which are produced in large quantities at relatively low unit costs. The principal component of the unit cost for these food products is their raw material (usually a basic grain commodity) constituent. Consequently, most food processing companies are greatly concerned with the prices they pay for their raw materials, and as the prices of these raw materials change, the typical food processing company's profits may be greatly affected. Since most companies prefer a steady growth rate, these raw material price fluctuations must be counter-balanced by other strategic or operating decisions. One basic set of decisions which is utilized to overcome raw materials price fluctuations involves the established commodity trading markets.