Picking the Price Risk Advisor That’s Right For You

Selecting a commodity price risk management advisor can be like selecting a medical specialist. You generally don’t go out of your way to find one if issues aren’t urgent but if the problem is serious and you need one, you need one now. Moreover, if surgery is what you must undergo you want a surgeon, not a general practitioner, and you want a skilled one. Such situations often call for hurried decisions that leave little time for research. Choosing a price risk management advisor in this same rushed manner is also ill advised, exposing the life of your business to the same spin of the roulette wheel.

There is no denying that some outstanding price risk management expertise exists out there. Much of it emanates from the financial and trading industries so is centered on building a hedge book and actively trading it. A typical bank swap desk will bring you a generic trading solution designed to make money for the bank but not solve the manufacturer’s deeper problem. Large consulting firms, who deal with every commodity industry from agriculture to zeolite, not to mention everyone else, also offer advice. They bring well-presented one-size-fits-all models with wide industrial application that hit many major items but they lack experience with the uniqueness found in each commodity business that only years of hands-on experience cultivate.

Too often price risk problems stem from specialized causes that are deep within the value engine of a business – like a poorly updated price list. Even worse and not uncommon, risk problems are spread at points throughout a business and caused by unfocussed management direction – such as a confused policy for hedging metal loss and scrap returns. These situations can be caused by inexperience and the need for quick fixes over time. Generalized risk models cannot easily correct process problems specific to your business. Elegant hedge management cannot correct bad underlying risk numbers on the commercial side and in fact smart trading, pretending to be hedging, can magnify financial volatility.

The fact is that the roots feeding price risk can be found in many of an organization’s operating departments. Price risk can arise from problems at the production tracking stage or from sloppiness embedded in commercial contracts. Inadequate or badly set up systems and poor reporting can bury the causes of problems or even magnify risk by impacting the accuracy of risk models. Bad internal communication causing financial slippage or conflicts produced by policies and goals set by management and the board are additional sources of problems still. When faced with issues like these, it is impossible for a risk desk to achieve the results a business requires. For such situations investigation by experienced hands is generally needed. For that you need specialists.

Businesses facing a price risk problem with suspected deep origins clearly require specialized and accomplished advisors. Proficiency with policy and goal formation may help refocus staff to manage the task at hand. Experience with physical processes and commercial terms can help pinpoint the cause of risk model divergence from reality. An understanding of the movement and use of information and required controls will help reduce error generation and even avoid fraud. Knowledge of systems and reporting can increase efficiency, control and understanding of program performance. If your business needs price risk management advice, don’t pick your advisor in haste. Research your advisor options, think about the nature of your risk exposure and pick wisely.

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