Exposure Meter

Managing Commodities Risk to Add Value

Is volatility in commodity pricing an element of business that is simply accepted, or can treasury leverage its understanding of related mitigation processes and financial tools to add value? TMI asked a trio of experts for their insight.

There is no doubt that commodity pricing is in a period of turmoil. Almost every business is exposed to unsavoury shifts, to a greater or lesser extent. But while some companies may have felt less direct impact than others, failure to efficiently manage a volatile cost base – that is, not simply passing increases on to customers – is neither good for financials nor reputation.

While commodity prices are generally below the peaks seen two years ago, the relative calming of markets today still sees some prices above pre-Covid levels. And the current wave of global instability suggests it will not take too much effort to throw the markets into disarray once again. Add in the urgent need for more investment to facilitate the switch to sustainable supplies of many commodities and it seems price stability is not something that should be counted on anytime soon.

With so many different commodities markets around the world – loosely divided between soft (such as agricultural products or livestock) and hard (typically natural resources that are mined or extracted) – risk mitigation is arguably more complex than for FX or interest rates.

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