how to hedge commodity exposure?

[duffman]

Hi,

I have a relatively simle question on hedging strategies. The situation is Company A buys some commodity (say grain) to run its business. The company wants to protect itself from fluctuations in commodity prices by hedging it. I am interested in analyzing the pros/cons of various hedging strategies.

Futures

Pros
- liquid

Cons
- margin requirements
- contracts are standard - not customized to exact company needs

Forwards

Pros
- customized contracts

Cons
- illiquid

Options

Pros
- minimum downside, unlimited upside

Cons
- expensive


I understand the above (or am I missing anything?). I remember hearing about another hedging strategy that would involve Company A creating a joint venture with Bank B in which B would be a majority holder at 51% and all the hedging would be done through this entity. This would result in no changing margin / liability requirements for Company A. I don't remember the details and not entirely sure how this would work - if anyone heard of this type of hedging, can you please share some more information about it?

Also - are there any other hedging strategies that Company A can pursue?

Many thanks.