Thomas Foods, Research Paper Example

Since Thomas Foods relies on several farming industries in order to produce its product, the company should begin its risk mitigation by utilizing hedging strategies to protect against spiking wheat prices (Blas, 2010). This particular industry is susceptible to risk primarily on the basis of the amount of crop that farmers are able to produce, which is based upon weather conditions and economic factors. To ensure that Thomas Foods is not impacted by droughts and other unpredictable weather patterns, it is essential for the company to consider purchasing its raw materials on global markets and then completing their final products domestically (Leo, 2011). This will allow the company to continue meeting customer demand in spite of many unknowns.

To ensure that Thomas Foods is able to operate continuously, it would be beneficial for the company to always purchase at least a portion of its raw materials from markets overseas. By acquiring wheat from several different geographic locations, the company can be certain that it will always have at least a portion of the wheat it requires to produce its products. This process eliminates risk by diversifying the food’s sources. In times of drought or other weather conditions, the company can therefore respond quickly and order more wheat from the unaffected locations to compensate.

Aside from hedging on the principle of physical commodities, Thomas Foods can ensure its safety by hedging in a manner that will provide good return on investment. Therefore, it may be useful for the company to become involved in a market neutral equity hedge. In this process, hedge fund managers will purchase stocks that are undervalued or short sell stocks that are overvalued (Barufaldi, 2014). Exposure to the broad market will be minimized. The intention of this investment method is to ensure that market movements do not impact the ability of the investor to gain profit. Rather, this will be based upon the hedge manager’s ability to select stocks effectively.

An additional hedging strategy that Thomas Foods can use in order to reduce risk is through the use of global macro funds (Ineichen, 2002). Essentially, this process involves the company investing in “stocks, bonds, currencies, commodities, options, futures, forwards and other forms of derivative securities” (Barufaldi, 2014). While this method is somewhat risky, it has the greatest return profile. Furthermore, it may be a reasonable method for Thomas Foods to attempt because its ability to conduct successful business locally is somewhat dependent upon its ability to obtain wheat. Therefore, having a global perspective can work to the company’s advantage.

It is anticipated that all the aforementioned hedging strategies will positively impact the company’s operating income. If all of the above strategies are employed, Thomas Foods will still have an adequate profit during wheat shortages and be able to compensate for the lack of product by doing businesses with nations overseas. It is important for the company to continue operations even when its raw materials are difficult to obtain in order to maintain consumer trust. Therefore, it is essential that Thomas Foods and similar companies utilize hedging to ensure that they will be able to continue to operate under a variety of conditions. Mitigating risk is essential in the food industry, because risk is more complex than simply understanding supply and demand. Many additional factors play into success or failure, and it is necessary for companies to understand how to use these potential pitfalls to their advantage.

References

BarufaldiD. (2014). Hedge Funds: Strategies. Retrieved from  http://www.investopedia.com/university/hedge-fund/strategies.asp

Blas J. (2010). Hedging helps foodmakers through uncertainty. Commodities. Retrieved from  http://www.ft.com/cms/s/0/88d1f506-a63b-11df-8767-00144feabdc0.html#axzz39vw8kXWR

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

Ineichen A. (2002). Absolute Returns: the risks and opportunities of hedge fund investing. John Wiley & Sons.

Leo B. (2011). G-20 Endorses World Food Programme Hedging. Retrieved from  http://www.cgdev.org/blog/g-20-endorses-world-food-programme-hedging