Commodity Price Risk Management

Hedging foreign exchange and/or interest rates are common risk management activities, with hedges usually executed on a periodic basis and supported by a documented hedging policy. In contrast, commodity price risks are often thought of as simply operational and, therefore, addressed solely via procurement’s inventory management activities. In fact, commodity prices can be significantly more volatile than foreign exchange rates.

Commodity prices can be a material, yet unaddressed, component of a company’s cost structure. Recent years commodity price inflation and volatility have led to commodity price levels and changes now having a meaningful impact on profitability. Correspondingly, the growth in the futures and OTC commodity hedging markets has resulted in greater liquidity and price efficiency.

In one instance, a company requested a review of their fuel price risks, assuming they would be ultimately undertaking an OTC-based hedging program. In fact, a large portion of the company’s exposures could be addressed by restructuring their purchase and sale agreements to achieve natural hedges, thereby resulting in a considerably smaller OTC-based hedging program.

PMC can assist clients in:

• Identifying and quantifying commodity price exposures;
• Evaluating purchase and sales agreements to identify natural hedges;
• Developing a commodity hedging strategy consistent with a company’s risk appetite, industry & hedging objectives;
• Documenting its hedging strategy in a Board-approved policy; and
• Executing its hedging strategy, thereby ensuring price efficiency.

Back