Archive for the ‘commodities’ tag
Risk In Emerging Markets
Managing Commodity Risk Has Emerged As A Key Issue In Today’s Economy. Commodity Risk Systems Have Never Been So Important Until Now…
Today’s volatile commodity markets present both commodity producers and end-users with enormous and exciting challenges, chief among them is the need to enhance shareholder value and reduce financial operating risks. Few of these challenges can be more exciting than the need to control exposure to the price risk of these commodities.
In the years from 2004 until 2009, commodity markets saw an unprecedented level of price volatility. Intense competition for international supplies of energy and agricultural commodities resulted in drastically higher prices and extreme volatility.
If your company happens to be a gold producer, the trend seems to be ride the wave as long as you can and keep your hedge book to a minimum.
However, for those companies where the commodity tends to be a cost input for the manufacture of goods, it is a different story. Commodity risk management is playing a pivotal role in the success of global firms in ways that old-fashioned purchasing managers could never have imagined.
Take for example, a Coca Cola. It has huge exposures to agricultural markets due to sugar and high-fructose corn syrup which are major ingredients into the production of soda. Let’s also not forget about the cost of aluminum that goes into the cans.
Or how about a bakery company like Flowers Foods or Sara Lee. Embedded in that cost of flour is the price of wheat. Years ago, when wheat traded within a narrow band of $3-$4, purchasing could take on a back seat role to sales and marketing. Now, however, that same flour purchase takes on a more strategic role due to sheer price volatility in the price of wheat.
The need for commodity subject matter experts has spurred on the rapid development of corresponding risk management instruments. Such solutions help risk managers and purchasers develop comprehensive risk strategies, and equip executives with the analytical edge to execute them.
Smoothing price volatility helps companies create tactical and strategic advantages. Companies are better able to manage working capital and to forecast cash flow more accurately. It also leads to earnings predictability which itself lends to investment and acquisition decisions and can improve a company’s financial leverage. Finally, there is greater recognition among executives that significant risks could be overlooked or underestimated.
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About the Author
Jeff Kaminker is a licensed Derivatives Trader with over 15 years experience working with structured financial products. His experience includes managing market risk for some of the largest food manufacturers in the world including George Weston Bakeries, Interbake, Maplehurst, and Stroehmann Bakeries. Jeff has a degree in Industrial Engineering, an MBA, and is licensed by the Ontario and Alberta Securities Commission in addition to being a member of the Professional Engineer’s Society and the CFA Institute.
Email: Jeff.Kaminker@Frontwater.ca
http://www.fwcapital.ca
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