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Multi-commodity price risk hedging in the Atlantic salmon farming industry

Author

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  • Haarstad, Aleksander H.
  • Lavrutich, Maria
  • Strypet, Kristian
  • Strøm, Eivind

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.

Suggested Citation

  • Haarstad, Aleksander H. & Lavrutich, Maria & Strypet, Kristian & Strøm, Eivind, 2022. "Multi-commodity price risk hedging in the Atlantic salmon farming industry," Journal of Commodity Markets, Elsevier, vol. 25(C).
    • Handle: RePEc:eee:jocoma:v:25:y:2022:i:c:s2405851321000167
    DOI: 10.1016/j.jcomm.2021.100182
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    More about this item

    Keywords

    Aquaculture; Salmon farming; Salmon feed; Risk management; Multi-commodity hedging; Copulas;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery

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