Commodity Volatility Reigns as Top Risk Hedging the Answer?

Over on PurchasingBizConnect, blogger Dave Hannon poses the question, “Commodity prices are up hedge or source? According to a recent Corporate Executive Board survey, Hannon explains commodity prices remain the number one risk for January 2010, “Fluctuations in commodity prices have disrupted companies’ forecasts and organizations are increasingly turning towards financial hedging strategies to manage this volatility.”  The Corporate Executive Board report cites an array of strategies companies currently use to manage commodity volatility. These strategies include:

  • Hedge through forward contracts, future contracts, options and alternate hedges
  • Buy substitute inputs
  • Trade finance solutions
  • Identify new credit facilities
  • Develop supplier partnerships
  • Buy and hold more inventory
  • Enter into fixed price contracts with suppliers
  • Evaluate pricing and discounts to maintain margins
  • Enter into long term agreements/contracts

Certainly our own anecdotal discussions with manufacturing organizations concur with many of the above-referenced strategies. In particular, in rising cost markets we see companies look to lock in prices sometimes as part of a formal hedging program, other times through the use of a forward buy. Throughout the fourth quarter of 2009, we consistently discussed the notion of “buying on the dips and/or taking some percentage of purchase volume “off the table. That last strategy might not guarantee “lowest price but it does create a hedge of sorts in that the company can manage sales margins, thereby reducing margin risk.

Here is a quick form to register and receive a free short white paper on how to use price indexes to manage commodity volatility we wrote back in 2008 during that rising commodity market. Ironically, it still contains some pointers useful in today’s up and down markets.

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–Lisa Reisman

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