Commodity Risk Management

What is commodity risk management and how is it used? Commodity risk management is a form of economic science specifically relating to the uncertainty of the future. Commodity risk management analyzes future market values, the size of future income as well as any possible fluctuations that may happen at a given point. Commodity risk management is needed in almost every business, from grain distribution to metal production and gas and electricity.

Commodity risk management deals with risks relating primarily to price, quantity, cost risk or political risk. For example, price risk involves risk that comes from negative fluctuations in world economy, exchange rates and how local prices are affected on a global scale. In commodity risk the groups of business that will be calling upon commodity risk management-that is services that handle commodity risk, usually providing turnkey solutions for many different processes-are as follows: Producers, Buyers, Exporters and Government officials.

Commodity risk management understands why these four categories are at risk. Producers, such as farming, mining or plantation companies, need commodity risk management to handle price risk, cost risk and quantity risk. The buyers that deal with producers deal with commodity risk management for price risk from the time of purchase to the port where they deal with the exporter.

The exporter needs commodity risk management for the period of time between port purchase and sale to the market. Exporters also have the need for commodity risk management because of various political risks associated with exporting licenses and foreign exchange. Finally, government officials need commodity risk management to deal with price and quantity risks for tax revenue, especially when tax rates rise as the result of commodity pricing.

Commodity risk management services offer economic evaluation and planning for producers, buyers, exporters and government on a fulltime or contract basis. For more information on the subject visit commodityriskmanagement.com