Ob jective

This team project aims to help students understand the practices in risk management. This includes doing research and collecting information on the asset(s) in the current macroeconomic environment. Students are also expected to expand their learning and readings as part of the researching process. Furthermore, understanding the nature of the risk that needs to be managed and providing risk management advice is required as the output of the report.

Theme of the task

You are asked to provide risk management advice to your client - Glycine Workshop on managing the risks associated with trading the soybean complex.

Background of your client:

Glycine Workshop is a small family-owned soybean processing plant that processes soybean into soy- bean meal and soybean oil. Soybean is one of the most volatile types of grains as a commodity. The yield is highly affected by the weather conditions, either too dry or too wet would not be ideal for crops.

Glycine Workshop is expected to yield about 400 million pounds of soybean oil per year. This amounted to almost 1.2 million tonnes (approximately 42.5 million bushels) of soybean as the raw product, which meant roughly a cost of $600 million per year at current prices. The manager of Glycine Workshop - Mr. Glycine, was unaware of the existence of hedging when he started the busi- ness in 2010. However, in the last two years, soybean price has increased dramatically, impacting the businesss cash flow to purchase soybeans as a raw product (as seen in figure 1).

With the current market condition, Mr. Glycine is worried about the stability of the business. After reviewing the inventory, Mr. Glycine expects to buy 0.4 million (approximately 14.2 million bushels) of soybean in November 2022.

About the business outputs:

Soybean meal can be manufactured by crushing the soybeans, and a by-product of this process is soybean oil. Soybean meal is commonly used for livestock feeding, as it has high protein and low amino acid levels. Therefore, we would expect the prices of soybean, soybean meal, and soybean oil to be highly related, and these three products are usually referred to as the soybean complex. Assume that for Glycine Workshop, based on their equipment and technology, they can process 100 bushels of the soybean into 2.4 short tons of soybean meal and 1100 pounds of soybean oil.

Get to know the derivatives on Soybean Complex;

Your first stop to find the information on derivatives on soybean should be the CBOT website:https://www.cmegroup.com/markets/agriculture/oilseeds/soybean.html

You can navigate through the tabs to find to learn the basic information on soybean derivatives (overview); QUOTES provide you with current market trading prices; Use SPECS to understand the information on the contract. You can also toggle between futures and options contracts.

• Soybean Meal https://www.cmegroup.com/markets/agriculture/oilseeds/soybean-meal.html

• Soybean Oil https://www.cmegroup.com/markets/agriculture/oilseeds/soybean-oil.html

  Soybean in current market - more resources posted on Blackboard

  Many factors can drive the change in the soybean prices in the market. Figure 1 is a Bloomberg screenshot of the price changes in soybean in the past five years. If you do not have access to Bloomberg (e.g. you are not on-campus), you can obtain the price chart on soybean through: https://tradingeconomics.com/commodity/soybeans.

Figure 1: Soybean Price Chart, retrieved on 7th August 2022

2.1 Do Nothing (10 marks)

Taking no actions could be a choice if the company thinks the risk is small and hedging comes with a cost. Discuss what your view on this approach to your clients business is. Demonstrate the pros and cons of doing nothing to your client, if this is their decision.

Need help with Q2.1 please.