What Cannabis Can Learn from Industrial Metal Buyers on Commodity Price Volatility and Risk

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Over the past half-year or so, it seems as though the cannabis industry is putting out a new press release every other day. And due to relatively recent state-by-state legalization, cannabis’ economic boom and the growth of its supply chain seems legit enough to spawn this spate of news.

In fact, just before beginning to write this article, I received another release on the latest industry growth numbers. And news just broke that the county in which MetalMiner HQ is based may get legal marijuana on an advisory referendum next March. Salad days for the green goddess!

Why go into all of this? Cannabis may have a lot to learn from the industrial metals sector when it comes to commodity price volatility and risk.

Cannabis (vs. Other Commodity) Price Volatility

In their recent report shared with our sister site Spend Matters, Cannabis Benchmarks (in some ways the MetalMiner Benchmark for the green sector), we can see how volatile cannabis prices are compared with other agro commodities:

Courtesy of Cannabis Benchmarks

Not surprisingly, the report states that “market price volatility can be troublesome for all the participants in the value chain.” That is precisely why most supply chain players should begin thinking strategically about managing supply — and not just price — risk (more on that in the next section).

Also not surprisingly, while traditional supply and demand factors such as weather drive many agricultural markets, “significant price jumps in regional cannabis markets appear to still be driven largely by regulatory decisions,” which we’ve reported on in detail. With cannabis remaining illegal under federal law, this is a trend unlikely to change in the short term, according to the report.

The paper goes on to outline the basics of hedging for participants in the cannabis supply chain — including the 101 on spot versus forward buying and contracts, OTC markets and swaps — with some examples to lay out what’s possible for the buyers and sellers within the nascent market.

Managing commodity price volatility and risk requires beginning to think about it strategically. Lisa Reisman, executive editor of Spend Matters’ sister site MetalMiner, knows a thing or two about that.

3 Reasons for a Commodity Management Strategy

Here’s more on how to begin framing the need for hedging strategies from Reisman (read the full article for more detail and examples):

  • Cost
  • The notion of supply chain transparency. Knowing how each entity within the supply chain prices its products and services only helps the buying organization better understand total cost of ownership (TCO).
  • Margin risk. By leaving the burden of extending quote validity periods or holding current pricing for longer periods of time to suppliers, the buying organization cedes control of its own ability to manage margins.

Ultimately, the cannabis industry is such a nascent frontier that now is the time for participants can begin hashing out their own agreements, using benchmark indexes, specifications and the basics of hedging, according to the Cannabis Benchmark report.

“In other commodity markets, such contract standardization has been created by participant pools, cooperatives, federal entities, and international organizations,” the report states. “Given the projected volume of transactions and currently planned centralization of distribution, the first actively traded hedging markets for cannabis could conceivably occur in California within a year.”

“It is contingent upon the industry to come together and create the framework and standards for this potential to be realized.”

Read the original article over on Spend Matters here. Need more specific guidance around commodity price risk management strategy? Contact us!  

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