Ep. 1 Introducing the Relevant Risk Podcast

Relevant Risk Podcast

Jan. 12, 2022

Fryar-Center Podcast
 

Media Contact

Mary Hightower

U of A System Division of Agriculture
(501) 671-2006  |  mhightower@uada.edu

Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence. In this inaugural episode, director of the Fryar Center John Anderson sat down with Andrew McKenzie, the associate director of the Center, to introduce the podcast and discuss the overall aims of the Fryar Risk Management Center of Excellence.

John AndersonJohn Anderson, Professor & Head
Agricultural Economics and Agribusiness
jda042@uark.edu

 

Andrew McKenzieAndrew McKenzie, Professor
Agricultural Economics and Agribusiness
mckenzie@uark.edu

Transcript

[00:00] Introduction: Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence, presenting conversations and analysis about risk and risk management for food and agriculture, supply chain decision makers from farmers to consumers and everyone in between. This is Relevant Risk.

[00:18] John Anderson: Welcome to the Fryar Center Relevant Risk podcast. I’m John Anderson, Director of the Fryar Center here today with my colleague Andy Mackenzie, Associate Director of the Fryar Center. Andy, how are you today?

[00:31] Andy McKenzie: I’m doing good. I had a nice Egg McMuffin this morning, so I’m feeling good.

[00:34] John Anderson: All right. Well, you’re fueled up for our discussion today. Sothis is our inaugural podcast, right? We’ve never done this, which I’m sure will be evident as we go through this, but we wanted to start our podcast series with a discussion of what we’re about at the Fryar Center. And I think a good way to get into that is really to talk about the name of this podcast, the Relevant Risk podcast, and we’ll kind of work backwards through that. Andy, let’s talk for a minute. You and I are, let’s say, not old, but seasoned academic professionals.  From our perspective in the academic world, what is risk? What do you think of — that term risk has a specific meaning for us, so, so elaborate on that. A little bit for our listeners.

[01:23] Andy McKenzie: Yeah, sure, John. Well, you know, often as economists, we want to distinguish between the two terms uncertainty and risk. And when I talk about uncertainty, what I mean is prices or price movements, which we often call volatility, where prices are jumping up and down. We don’t really know what those prices are going to do for a specific commodity. So, we can be uncertain about what’s going to happen. But what’s really concerning for the Center is how do you deal with the risk of that uncertainty? So, in other words, every time prices move up or down, that has some sort of risk element for a company or farmer or a business in the supply chain. And risk in particular from an economic standpoint means that it has a material effect or impact, a price change, on the bottom line, or profit, of a company. And how you deal with that risk is what we’re all about.

[02:17] John Anderson: So, in a sense, Andy, uncertainty is that – and there are several different ways to frame this distinction between uncertainty and risk. You know, sometimes people say uncertainty are things that can’t be quantified and risks are things that can be quantified. You’re making a useful distinction here that uncertainty is just the volatility or the movement of a particular variable.  But risk is really in the eye of the beholder. It’s the part of that uncertainty that potentially leads to a loss for you as a specific decision maker. Is that a fair way to put that?

[02:52] Andy McKenzie: I think that’s a really good way to put it, John. Yes. And you know, there’s various ways that companies can manage that risk. And one thing that we’re all about at the Center is trying to identify what is the particular price risk that firms face because, you know, it can be very different depending on who you are and where you are in the supply chain. And how you deal with that risk is whether it’s using futures markets, options forward contracting; there’s various ways to deal with it, but everybody has to know what is the risk that they face in order to manage or deal with it.

[03:24] John Anderson: And that leads to the next point I want to discuss around risk and that is, OK, once we understand what risk is, the next step then is how do we manage that risk? So, talk a little bit about that. What does it mean to manage risk? And what are some of the keys to risk management from the perspective of key players in the supply chain?

[03:42] Andy McKenzie: Yeah. I mean, you know, if you think about it, if we start at the beginning, we’re thinking about farmers, then they’ve got obviously price risk involved when they’re growing a crop. So, during the pre-harvest period, they don’t know what price they’re going to be able to sell their corn, soybeans, whatever it may be at harvest time. So, they have the risk the prices will drop or fall between the time they plant the crop to when they actually physically sell it in the marketplace. So, they’ve got that price risk. They cannot totally remove price risk, but can manage it to some extent through forward contracting with the people that they’re selling to, which typically for row crop farmers would be country grain elevators.  Or they can manage the risk more directly themselves by going to the futures market and hedging that risk. Now we move a little bit up the supply chain, the elevator guys or the merchandizers, they’re the ones who are buying from the farmer, they also have risk, but they’ve got the risk that prices are going to increase on the purchase side. Well, one thing that they do to manage that risk is offset it automatically in the futures market by hedging. And what they really do is then replace price risk with what is called basis risk. And from that point on, they are most then concerned with trading basis and trying to make profits from the way basis moves.

[05:02] John Anderson: And basis is the difference between prices in the cash market and prices on the relevant futures contract.

[05:07] Andy McKenzie: Exactly. And that as we continue to move up the supply chain, we’ve got folks who are buying the commodities from these merchandizing or elevators. And they’ve got the risk again that prices will be too high. And again, they can try to forward contract with the elevators, or again, get into futures or options markets to manage that higher price risk.

[05:27] John Anderson: So at all points in the supply chain, everybody in that chain faces a risk of some kind, but different people are on different sides of that risk. So, the potential for loss is coming from a different, a different direction, depending on where you sit in that supply chain.

[05:42] Andy McKenzie: That’s exactly right. So, some companies and firms, like farmers, are more what I would call price-oriented on their risk. Some are less price-focused because they are dealing, in effect, with this basis idea. And so, depending on who you are, will dictate what sort of strategy you ultimately use to try to manage that risk.

[06:01] John Anderson: Right. Very good. That — and I think that that flows nicely into the last point we want to make and that deals with the first term in our podcast name: relevant. What is relevant risk or relevant risk management?  And here I think the key is that relevant ties into a particular decision or decision-making process that somebody is involved in.

[06:26] Andy McKenzie: Yeah, that’s that’s very true. And you know, the relevancy partly stems from what are current market conditions and are prices likely to go up in the near future, which will impact you? Are they likely to go down and so forth? All of these are decisions then which play into how to manage risk.

[06:44] John Anderson: So, in terms of relevant risk management, we have people in the supply chain that need to understand their risk exposure, understand the tools that are available to them to manage that risk, and understand how to deploy those tools to maximum effectiveness.

[07:02] Andy McKenzie: That’s exactly right. And I think, you know, that really gets down to a three-point mission of the whole center. So, we’re very much interested in trying to research and get into depth on what is the risk and how to manage it and what likely factors are going to influence risk in the future for different commodities. Then we’re also very interested in teaching, students in particular but also from an extension point of view, trying to educate what we call stakeholders, which would be farmers or agribusiness firms again, on how to manage that potential risk that they face. So, we have a research arm, a teaching arm and also an extension arm.

[07:42] John Anderson: Very consistent with our setting in a land grant institution, the old threefold land grant mission is something that the Fryar Center as a center will be pursuing as well. And I think we’d probably be remiss if we didn’t end this podcast by saying a little bit about our founder and benefactor, Ed Fryar. The Fryar Price Risk Management Center of Excellence is named after Ed Fryar: Ed and Michelle Fryer, both alumni of the ag economics department at the University of Arkansas. Ed was a professor at the University of Arkansas in the department after getting his Ph.D. at the University of Minnesota, and Ed actually left the university to forge a very successful career in the poultry industry. And Ed — Andy, I think it’s fair to say that Ed was very well known for his focus on risk management in his business life.

[08:37] Andy McKenzie: I think that’s very true, John. And I think he definitely told me time and time again that that gave him an edge in the poultry industry. Being able to have that knowledge on how to manage input price risk really helped his firm through difficult times. And you know, Ed is definitely a unique character because I don’t know about you, but there’s no way I could be successful in the private industry world. And, you know, to be able to be a successful academic and to be able to be successful in private business really impresses me.

[09:06] John Anderson: Yeah. Well, I can barely be successful in the academic world, so I’m definitely not going to try the private world. But Ed has established a legacy, I think, with this Center. He made a career out of managing — understanding risk and managing risk effectively. And he has graciously helped find this center so that we can generate new knowledge around those topics and share that knowledge, as you said, not just with other academic professionals, but with stakeholders and with students. And so that’s the mission we’ll be pursuing. This podcast will be our way of keeping the public informed of how we’re pursuing that mission. We’ll be back with a number of topics and current issues and other industry experts and professionals in risk management to talk about ways that we can evaluate and manage risk effectively.

[10:02] Andy McKenzie: Yeah, I think, John, that I think a key thing for our center is to do what we’re going to call industry-informed learning. And I think that’s very important because we depart a little bit from traditional academia, maybe there where we have to talk to industry folks and find out specifically how they run their businesses and what is the risk that they face before we can then address the question of how to actually manage that risk.

[10:27] John Anderson: And I think that’s a great I think that’s a great point to end on, Andy, because that really highlights why what we do will be relevant. We will take the ideas and the concerns that come from industry and address those with the best scholarship that the academic world can come up with. And we look forward to sharing that with the public through this podcast, through publications, through conferences and through the website.  All right, that’s it for the Fryar Center Relevant Risk podcast for today. Thanks for joining us, and we look forward to seeing you next time.

[11:02] Conclusion: Thanks for listening to the Relevant Risk podcast. A production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas system. The Fryer Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural Food and Life Sciences at the University of Arkansas in Fayetteville, and research and extension activities through the University of Arkansas System Division of Agriculture. Visit Fryer, Dash Risk Dash Center dot UADA dot Edu for more information. Thanks for listening!

About the Division of Agriculture

The University of Arkansas System Division of Agriculture’s mission is to strengthen agriculture, communities, and families by connecting trusted research to the adoption of best practices. Through the Agricultural Experiment Station and the Cooperative Extension Service, the Division of Agriculture conducts research and extension work within the nation’s historic land grant education system.

The Division of Agriculture is one of 20 entities within the University of Arkansas System. It has offices in all 75 counties in Arkansas and faculty on five system campuses.

The University of Arkansas System Division of Agriculture offers all its Extension and Research programs and services without regard to race, color, sex, gender identity, sexual orientation, national origin, religion, age, disability, marital or veteran status, genetic information, or any other legally protected status, and is an Affirmative Action/Equal Opportunity Employer.

About the Dale Bumpers College of Agricultural, Food and Life Sciences

Bumpers College provides life-changing opportunities to position and prepares graduates who will be leaders in the businesses associated with foods, family, the environment, agriculture, sustainability and human quality of life; and who will be first-choice candidates of employers looking for leaders, innovators, policymakers and entrepreneurs. The college is named for Dale Bumpers, former Arkansas governor and longtime U.S. senator who made the state prominent in national and international agriculture. For more information about Bumpers College, visit our website, and follow us on Twitter at @BumpersCollege and Instagram at BumpersCollege.

Media Contact

Mary Hightower

U of A System Division of Agriculture
(501) 671-2006  |  mhightower@uada.edu