So When Do You Need Price Risk Management?

Welcome to the new CRMA-CRCI website and blog! We hope you’ll find them both informative and useful. They are the “public face” of the new alliance between Commodity Risk Management Associates and Commodity Risk Control, two consultancies devoted to providing commodity price risk management services to clients who require long standing solutions for their unique problems.

For those not familiar with commodity price risk here’s a simple scenario. You can operate the best commodity processing business there is, converting raw material at a higher rate and more cheaply than anyone else. In addition, your quality can be the best and you can sell your product at the highest price but even with that in place, because of the timing of your buying and selling, one month with a big commodity price move can still threaten or even wipe out your business.

Many managers, particularly the operationally oriented ones will not consider such an outcome at all while others will say “it’s simple, just hedge the risk away”. That may well be correct in part but, if there is one message we want to promote with this website and reinforce with this blog, it is that price risk management involves a process and before hedging happens, work must be done that integrates the process with the business. If it isn’t done well, how do you know you that:

• risk exposures are unavoidable or even unwanted?
• people responsible are structured and aligned to manage risks properly?
• the size of the hedge will offset the risk?
• the hedges are properly controlled and administered?
• the capability exists to report results that explain a clear and logical outcome?

So when do you need price risk management? The answer is, it is like accounting, you need it all the time as a basic part of your business.

In the wider world, commodity markets are evolving quickly. Structural consolidation, changing technologies and material end uses, the rapid rise of Asian economies, the influence of investment in commodities and quickly evolving regulations are reshaping the commodity sphere. Much of this touches our field too so there is a lot to talk about. The CRMA-CRCI blog is backed by over 70 years of combined experience across commodities and continents to introduce price risk management issues to you in greater depth. Whether you are in the commodity business or not we are hoping pique your interest in price risk management and we will do our best to keep it interesting. Thanks again for joining us!

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