Case Study: Cal Poly University improves agricultural margin management with Lumivero @RISK

Palisade Software Determines Best Method for Managing Margins in Agriculture

Cal Poly University sought to verify the long-standing agricultural practice of using an 80% hedge ratio to manage financial risk for produce growers. The challenge was to determine if this rule-of-thumb was truly the optimal strategy for protecting farm margins and free cash flow against market volatility, or if it exposed growers to unnecessary risk. To conduct this quantitative analysis, the university's agribusiness experts utilized Lumivero's @RISK software.

Lumivero's @RISK solution enabled a sophisticated simulation of costs and revenues to model various hedging strategies. The analysis revealed that the traditional 80% hedge strategy left a surprisingly high probability of losses severe enough to jeopardize a farm's ability to service its debt. The results showed that speculating on the spot market with 20% of production was not profitable, with a loss-to-gain ratio of 17:1, and that a more conservative, fully-hedged approach was far more effective at stabilizing long-term profits. This insight provided by Lumivero empowers growers to make data-driven decisions that significantly reduce their risk of financial default.

Cal Poly University

Steven Slezak

Aribusiness Department