COMMODITY PRICE RISK MANAGEMENT
RC: Broadly speaking, how would you describe the commodity price risk challenges facing companies today? How important is it for companies to have sound knowledge of the commodities markets?
Kose: Commodity price volatility has made and broken entire companies over the last few years. Regardless we still see companies that are totally unprepared for the strategic challenges which can be posed by movements in underlying commodity prices. While the S&P 500 has an annualised volatility of around 20 percent, in 2014 for example, the magnitude of annualised average volatility of corn was 40 percent and wheat was 65 percent, highlighting the significant price risks which need to be managed by buyers, traders or sellers of commodities. Executives want to be more focused on understanding the drivers which shape prices in these markets and how this translates into bottom line performance. The three key areas of focus for us are gaining information about where a company’s exposure lies, gaining insight into what shapes these markets and the volatility to which a company could be exposed, and understanding the impact of commodity prices on the bottom line, on strategic goals and on the operating model.
Jan-Mar 2016 Issue