Managing Risk with Confidence
Commodity markets are facing many challenges today with oversupply, low prices and uncertainties, making managing price risk a critical skill for financial professionals. The 2016 AFR Risk Survey from the Association of Financial Professionals revealed commodity prices are one of the top drivers for earnings uncertainty across industries.
Global economic instability and volatility have material impact on commodity prices and a company’s ability to contain costs and protect margins. Even though we are operating in a historically low-price environment, commodity markets are not immune to dramatic, often unpredictable swings.
In April, we saw soybeans and corn rally as much as 13.7%. These prices did not move us far from historical lows, but the sudden market rally was surprising for many. To minimize uncertainty or maximize opportunity in these markets, it is critical to engage in risk management strategies that ensure you are well prepared for a sudden rise or drop in prices.
At Cargill, we know that effective commodity price risk management requires expertise, timely access to relevant insight and support from internal stakeholders. This is why we have been providing the risk management solutions we’ve utilized in more than 70 agriculture, energy and metals markets, to our customers for more than twenty years.
Be Proactive
Having no hedging strategy is a risk in itself. Even if we do not know where the markets will be this week, a few months or years ahead, we can thoughtfully construct a risk management plan with our bias, experience and needs in mind. The goal is to feel confident that you have made the right decision for your company, in your markets, at this time.
Diversify Strategies
Diversification is essential for overall risk mitigation. For years, hedging risk through the trading of futures and options was cutting edge. In today’s markets, risk managers seek greater ability to identify, assess, prioritize and manage price risk. To be effective, evolving strategies with more customization are utilized to manage exposure.
Pursue Dynamic Methods
Price points are impacted by a variety of factors and that means simply hedging risk through futures trading or a fixed instrument will not meet all needs. Tailored options, currency hedging, structured products and other customized solutions are coming into play more often. A strong hedging portfolio is not overly concentrated in any one of these methods, but utilizes the appropriate solution to meet needs, objectives and risk tolerance.
Take a Holistic Approach
When you are constructing your retirement portfolio, you are likely diversifying your exposures in stocks, bonds and equities to ensure you are not putting your security and livelihood at risk should the market turn. The same is true for a commodities hedging strategy – concentrating all of your risk mitigation in one or even two types of products does not offer the same protection. Instead, you are likely making less pragmatic decisions and responding to every market move – which is ineffective given how quickly prices fluctuate.
Utilize Various Counterparties
In the past, corporations might have worked exclusively with large banks to seek solutions. Today, companies seeking to diversify their counterparty risk have opportunities to work alongside non-bank organizations to achieve their hedging objectives. When seeking a partner in risk management, ensure they provide a stable balance sheet and reputation, while also meeting regulatory requirements.
We can’t control the markets, but we can make confident decisions, utilizing diversified strategies and a proactive approach to risk management.
The CargillVoice team provides information on important topics related to helping businesses and other stakeholders be more successful. Learn more about creating a diversified and dynamic hedging strategy in today’s complex commodities markets. Our stories focus on practices, products and services that help people and organizations thrive.
These materials have been prepared by personnel in the Sales and Trading Departments of Cargill Risk Management, a business unit of Cargill, Incorporated based on publicly available sources, and is not the product of any Research Department. These materials are not research reports and are not intended as such. These materials are for the general information of our customers and are a “solicitation” only as that term is used within CFTC Rules 1.71 and 23.605, as promulgated under the U.S. Commodity Exchange Act. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any swap, security or other financial instrument. These materials contain preliminary information that is subject to change and that is not intended to be complete or to constitute all of the information necessary to evaluate the consequences of entering into a swap transaction and/ or investing in any securities or other financial instruments described herein. These materials also include information obtained from sources believed to be reliable, but Cargill Risk Management does not warrant their completeness or accuracy. In no event shall Cargill Risk Management be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained in these materials and such information may not be relied upon by you in evaluating the merits of participating in any transaction. All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions. Actual results will vary, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice. Cargill Risk Management is a provisionally registered Swap Dealer and operates under “Order of Limited Purpose Designations for Cargill, Incorporated and an Affiliate.”