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Shaping Up Commodity Risk Management

How to build a program that mitigates the companys exposures to commodity price swings.

By Phil Weeber, Bryant Lee | Updated on October 29, 2014
“Maximize returns, minimize risk.” That mantra makes financial risk management sound simple. But if managing commodity exposures, for instance, were easy, every company would eliminate the uncertainty around its spending on key inputs without decreasing profits.

Obviously, it’s not simple at all. In fact, the challenges inherent in commodity risk management are reminiscent of obstacles people face when they’re trying to lose weight. We’re told, “Eat less and exercise more,” but that’s not as easy as it sounds either—which explains why we’re not all in superb shape. Both fitness and risk management require discipline and structure to get results.

Every treasury professional should understand how to build a successful strategy for reducing the impact of commodity price swings on the company’s financial statements. Crafting a commodity risk management program requires thoughtful consideration of several key aspects of the process: getting started; setting goals within a written plan; changing a few things at a time, instead of everything at once; and developing routines that are congruent with the goals. Breaking a company’s vision of commodity risk management into well-defined, and well-managed, pieces may not be as exciting as a TV weight-loss show, but it has a much higher chance of success over the long term.

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