Abstract
Cost management has received limited attention in the aquaculture industry due to historically high profit margins. This trend, however, is not likely to continue. This creates a need for knowledge on optimally managing financial risks. In this study, we address the joint input-output price hedging problem of salmon farmers. Along with salmon, we consider three essential commodities used in fish feed mixtures. We use state-of-the-art copula models to examine multi-commodity hedging strategies. Our results show significant potential in reducing the joint price risk. Our key finding is that multi-commodity hedging improves hedging effectiveness for short horizons and risk-return trade-off for longer horizons. Salmon farmers face a trade-off where longer hedging horizons yield increased effectiveness and lower costs, yet require increased pre-planning of slaughtering volumes.
Highlights
Improvement of risk management practices is a crucial step towards achieving economic sustainability and profitability of the salmon farming industry
We address the price risk hedging problem for farmers of Atlantic salmon
We analyze a salmon producer that partially can hedge the risk of both input and output price movements by trading in futures markets for feed ingredients and salmon
Summary
Improvement of risk management practices is a crucial step towards achieving economic sustainability and profitability of the salmon farming industry. This, together with seasonality in growth and harvesting, result in large variations in salmon supply which carry over into financial markets and contribute to volatile prices (Oglend, 2013; Thyholdt, 2014; Asche, 2017) Another contributing factor to increased volatility are spillover effects from other markets (Dahl and Jonsson, 2018a,b; Dahl and Yahya, 2019). Increasing volatility in prices for salmon feed input commodities such as soymeal contributes to higher uncertainty in salmon farming operating margins going forward. This has further exposed the need for better risk management practices in the industry
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