Managing Commodity Risk in Your Supply Chain | Sphera (2024)

FAQs

How to manage commodity risk? ›

Commodity price risk is the financial risk on an entity's financial performance/ profitability upon fluctuations in the prices of commodities that are out of the control of the entity since they are primarily driven by external market forces.

Factors that can influence commodity prices include politics, seasons, weather, technology, and market conditions. Some of the most economically essential commodities include raw materials, such as the following: Cotton.

The Commodity Manager would be responsible for the entire strategy for buying their respective Commodity. They would be responsible for Supplier selection, negotiations, terms and conditions, sourcing decisions, competitiveness, and performance management.

The supply of a commodity is affected not only by price but by other factors also which include: (i) prices of other commodities, (ii) prices of factors of production, (iii) objectives of the producer, and (iv) production technology.

The term market risk, also known as systematic risk, refers to the uncertainty associated with any investment decision. The different types of market risks include interest rate risk, commodity risk, currency risk, country risk.

However, the risks associated with commodity investments are substantial. Uncontrollable factors such as inflation, weather, political unrest, foreign events, new technologies and even rumors can have devastating consequences to the price of a commodity.

Commodities are considered risky investments because the supply and demand of these products are affected by events that are difficult to predict, such as weather, epidemics, and natural and human-made disasters.

How are commodities manipulated? ›

The two forms of market manipulation most discussed by courts are the market “squeeze” and the market “corner.” A corner happens when a dominant market player has a near monopoly holding of a cash commodity and also holds “long” futures contracts to buy in excess of the amount of the commodity actually available.

Diversification is more effective in mitigating unsystematic risk, known as specific or idiosyncratic risk. This type of risk is specific to individual assets or companies and can be reduced by spreading investments across different assets with varying risk profiles.

Commodity risk is the threat of price fluctuations of a raw material. For commodity producers, a decrease in raw material prices is going to hurt, because they're going to receive less money for the raw material that they're providing.