Reducing price risk is a high priority within the grains supply chain. Most grain producers, suppliers and consumers see the value in hedging. The reasons are varied but the desire to hedge comes primarily from a preference for greater price certainty and locking-in margins. These are worthwhile pursuits, to be sure, but often the results are mixed.
In many cases, the entity hedging is successful at reducing price risk in its physical grain sales or purchases but is left with earnings volatility caused by the change in value of its hedges – exchanging one source of volatility for another. This is an unfortunate trade-off that leaves stakeholders wondering whether or not hedging was worth it in the first place.
How does an entity take credit for risk management and improve its earnings results? Hedge accounting. Hedge accounting is a preferential accounting treatment. It helps entities to smooth out period-over-period earnings and presents a more budget-friendly result. With hedge accounting you can participate in hedging activity to limit price volatility in grain purchases or sales while reducing earnings volatility in financial reporting. Call a HedgeStar consultant today and have a conversation about how we can help you with hedge accounting.
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