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Thomas Foods 1969, Research Paper Example

Pages: 1

Words: 1475

Research Paper

Introduction

Thomas Foods, incorporated in 1969, sells produce purchased from farmers around the country. Since this industry is dependent upon the crop yield that local farmers are able to produce, the company is also dependent on generally uncontrollable factors involved in farming. These include the impact of government subsidies, weather conditions, the availability of workers, and a variety of other unpredictable measures. Therefore, it is essential for Thomas Foods to conduct a process of risk mitigation in order to prevent an unexpected increase in price from their farmers, which will ultimately damage their business through altered profitability. Thus, hedging strategies can be implemented in order to stabilizing the operating income.

Purchasing Products Overseas

The most ideal way for Thomas Foods to protect itself against price changes offered by local farmers is to diversity the markets from which it purchases its raw product. While farmers around the world are expected to deal with similar issues regarding growth and yield, this is unlikely to occur to all farms in all countries at the same time. Therefore, it is essential for Thomas Foods to partner with farmers in several countries. When local crop prices increase due to shortage or a variety of other reasons, Thomas Foods can continue its profitability by purchasing crops overseas. It is important to consider that in this scenario, there would be additional taxes and fees for the import of these goods, but in large quantities, this can be beneficial in comparison to the local price inefficient alternative.

In order to ensure that Thomas Foods is always able to gain a continuous supply of raw product, it is essential for the company to continually purchase some of its produce from the overseas market. Thus, the unpredictability of their goods availability will be diminished slightly, as they will always have product available from at least one source and be able to make a timely to decision to purchase more or less product from different places. Diversifying food resources is an essential manner in which the risk of food industry members can be reduced. This process involves having already establish contacts in a variety of locations that would be willing to change the quantity of food in each order depending on Thomas Foods’ needs.This will have an impact on the profitability of the company because they will always have approximately the same amount of product to sell at a price that is relatively constant throughout seasons.

Neutral Equity Hedge Investment

It is essential for Thomas Foods to place some of its funds in other aspects of the market in order to ensure that some degree of it is able to generate additional profit. Ultimately, an effective way of doing so is investing in a market neutral equity hedge, so that the company can expect a good return on investment. In this process, hedge fund managers typically purchase stocks that are undervalued and short sell stocks that are considered to be overvalued.This will allow exposure to the broad market to be minimized and the goal of this investment method is to essentially ensure that movements that occur within the market will not impact the ability of the investing company, in this case Thomas Foods, to gain profit.Instead, profitability will be based upon the ability of the hedge manager to effectively select the appropriate stocks for investment using the company’s funds.

Global Macro Funds

An additional hedging strategy that Thomas Foods can use to reduce risk is by taking advantage of global macro funds. This is an additional investment method that is intended to compliment the aforementioned use of the neutral equity hedge investment. By investing using these two methods, the company will be able to effectively diversify its investments and further reduce the company’s risk overall. The main investment strategies that have been recommended thus far include neutral equity hedge investments and global macro funds because both of these strategies solve the risk mitigation problem that Thomas Foods is having from different angles. Ultimately, the neutral equity hedge investments are more predictable because stocks are bought and sold provided that they fall under certain categories. Using global macro funds, the company would invest in a variety of financial options, including various forms of derivative securities, options, futures, commodities, bonds, stocks, and currencies.By investing in a variety of sources in markets around the world, this diversification strategy is different, and will therefore allow the company to mitigate overall risk.

The use of global macro funds is a particularly useful strategy because investing in a variety of global markets allows for a greater degree of stability. Because Thomas Foods is dependent upon its ability to gain produce either locally or overseas, this is a useful method to use. It makes the company remain stable against global market prices in more ways than one, when paired with the strategy they will use to diversify by purchasing products overseas. It is important for the company to have a global perspective in order to ensure that it will be continually successful.

Conclusion

It is essential for Thomas Foods to use a combination of the three strategies discussed in order to ensure success. The diversification strategy is dependent on the company’s ability to become independent of impacts caused by the local market. When the company is more closely affiliated with the global market, it will become more stable because it is rare that the economic climate of all of the world’s countries will simultaneously shift. Therefore, it is recommended that Thomas Foods utilizes a combination of diversification and acquisition of products overseas, natural equity hedge investments, and global macro funds to protect itself and to ensure that its operating profit will continue to be fairly resistant to the market.

While Thomas Foods is currently involved in a risky business, it doesn’t have to be. Since its primary product, produce, is cultivated all over the world, it has no need to limit itself to local business in order to ensure that it will be successful. While investing in local business may seem preferable in part because the goods will not be subject to import taxes, it is also essential for the company to protect itself should anything go wrong with these crops. Unfortunately, the farming industry is extremely unpredictable, and farmers can never be completely certain of what their yields will be each season. Therefore, while Thomas Foods should partner will some local business, these products should only comprise about half of what is sold, and the other fifty percent of produce should come from a variety of foreign countries with different economies and weather patterns.

Thomas Foods’ first and foremost concern should be the determination of whether it is able to stay in business and sell the same about of product regardless of the farmers’ yield. Therefore, it is necessary for it to continue generating the same income so that even during seasons with poor yield, it will be able to continue its operations. Utilizing neutral equity hedge investments will allow the company to do this because it will help them generate a product even when a lack of product is available to be sold. This profit will allow them to continue operating and to deliver the products to local people from overseas. While imported goods are typically more expensive, the money earned from these investments will help offset some costs.

Ultimately, it is essential for Thomas Foods to recognize that the availability of food in the produce industry is more complex than principles of supply and demand. The supply is very susceptible to change in this case, while the demand will remain the same. Risk mitigation is of ultimate importance in this industry because it will allow companies to use these potential difficulties to their advantage in a variety of situations. Therefore, it is essential to diversify in many different ways in order to ultimately ensure that there will be stability in the industry, which will in turn stabilize profit. The strategies discussed in this proposal are not the only way of mitigating risk, but are the most appropriate for companies in the produce industry. Therefore, it is highly recommended that Thomas Foods follows the advice presented in this proposal.

References

Boumlouka M. (2010). Regulation and Transparency in US OTC Derivative Markets. Hedge Fund Society Hedge Fund Society.

Boyson NM, Stahel CW, Stulz RM. (2010). Hedge Fund Contagion and Liquidity Shocks. The Journal of Finance, 65: 1789–1816

Lemke PE, Lins GT, Hoenig KL, Rube PS. (2014). Hedge Funds and Other Private Funds: Regulation and Compliance.Thomson West.

Lemke PE, Lins GT. (2014). Regulation of Investment Advisers. Thomson West.

Lemke PE, Lins GT, Smith T. (2014). Regulation of Investment Companies. Matthew Bender. Partnoy FS, Thomas RS. (2006). Gap Filling, Hedge Funds, and Financial Innovation. Vanderbilt Law & Econ., 06-21.

Kahan M, Rock EB. (2007). Hedge Funds in Corporate Governance and Corporate Control. University of Pennsylvania Law Review, 1021.

Stowell D. (2010). An Introduction to Investment Banks, Hedge Funds, and Private Equity: The New Paradigm. Academic Press.

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