Buy Lower; Sell Higher

“Under mounting pressure from surging commodity prices, makers of the name-brand foods that fill the nation's grocery shelves are fighting back… One of the most effective weapons used to defend their bottom lines -- and one they rarely discuss in public -- involves placing big bets in the grains market, a strategy known as hedging.

“Food makers use hedges to protect against sudden price moves, smoothing out some of the peaks and valleys in the commodities market by managing risk through futures and options. This gives them a better idea what costs they are likely to encounter in the months ahead, crucial to budget planning...

“The company should be in a strong position to offset future costs. For 2008, General Mills has hedged 66% of its costs for key commodities, such as wheat and fuel.

“‘They are smartly locked in,’ said Edward Jones analyst Matt Arnold… ‘They are as well-hedged as anybody.’

“Food makers are facing unprecedented costs for their ingredients. The Agriculture Department forecasts average prices for wheat, corn and soybean meal will continue to hover well above their 10-year averages through 2008…

“It has become dicier these days to pinpoint the costs of grains and other commodities…

“Sanderson Farms Inc., a major buyer of soybeans and corn to feed its chickens, said 10% of its soybean delivery has been priced in through the rest of the year.

“On the other hand, the company said it is fully exposed to market prices for corn, with any market advantage on this front hinging entirely upon whatever terms it can negotiate with suppliers. Laurel, Miss.-based Sanderson Farms doesn't stockpile feed grains, keeping only a week's worth in its mills at a time.

“‘At these values, we just think it would be the wrong time to do a lot of forward pricing,’ said Chief Executive Joe Sanderson… citing uncertainty about the amount of corn being planted. This is the cautious approach taken by buyers wary of locking in high prices when there is a chance prices in the grain market might move lower.”

(“Corporate News: Food Firms Hedge Against the Grain.” Matt Andrejczak. The Wall Street Journal. March 24, 2008. pg. B.4)

EXCELLENT STRATEGIC MANAGERS detect discontinuity by disrupting our thinking.

Is this a trend? Does it have legs? What about reversion toward the mean? Has there been a seismic structural shift in the way markets behave? Are the rules being re-written? Will the norm prevail?

Who can see? For every buyer who sees a low price, there is a seller who sees a fully-valued price. Maybe this is why we say "bets" ...