What Is Commodity Price Risk?

Commodity price risk is simply the potential for adverse movements in commodity prices. For example, a wheat farmer faces the risk of falling wheat prices in the domestic or international market, resulting in a loss of income.

What is commodity price risk management (hedging)?

Commodity price risk management, or hedging, is simply the process of identifying and managing commodity price risk. Whilst commodity price risk cannot be eliminated, it can be effectively managed. Being involved in the agricultural sector, you will know that movements in the value of commodity prices can have a significant impact on the cash flow and profitability of your business.

The goal of commodity price risk management

You should consider establishing a philosophy whereby the primary goal of commodity price risk management is to protect the economic value of your business from the negative impact of commodity price fluctuations, at the lowest possible cost. Because commodity price volatility also provides opportunity for gains, a secondary goal is to strike a balance between risk and return. Risk management provides the ability to accurately budget on cash flow receipts.

Important information about advice
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. View our  Financial Services Guide (PDF 59kb).