Commodity price risk management (CPRM) is increasingly being adopted by large manufacturing and retailing businesses that have commodity exposure within their cost base. An effective hedging strategy, executed well, enables a business on average to perform better than the market.

The situation is different in each business, but we often find that existing practices don’t go far or fast enough. There are many signs that a business is not doing well enough – below we explore three areas.

1. Governance
One of the critical aspects of effective CPRM is to have the right governance protocols, supported by appropriate systems to govern CPRM activities. The use of Excel to track your risk position is an immediate red flag. There are many issues with using Excel to govern your risk activities and track your risk position. For example:

• People can edit formulae in Excel that go unnoticed for months/ years
• There’s no tracking of who made what changes, when
• Changes can be made well after the event, with no record of this
• Multiple versions of the file get created
• It’s not audit friendly
• It lacks the power needed for large files and numerous links and dependencies

Another sign of governance issues are when the lines between those responsible for making trades and those measuring trade effectiveness become blurred – it’s critical to ensure it’s 100% clear and understood which function is responsible for which price risk management activity.

2. Culture
Issues with how CPRM is approached often manifest themselves in the culture that results. Some examples:

• The business asks the wrong questions of itself, and is more concerned about how coveredit is, rather than how much risk it faces
• Hedging goes out only 3-6 months and the business struggles to take a more long term perspective
• A budget led culture where the aim is to meet budget, not beat it. This can lead to buyers needlessly locking out too early, significantly missing out when a market drops. The business is happy with this, and is unaware of the cost reduction it has missed.

3. Decision making
This is the ultimate test of how effective CPRM is. If greed and fear overly influence your decision making, or the opinions of senior managers dictate activity, then you have a problem. Equally, if trading decisions are made too infrequently – or not at all when they should be – then there is significant room for improvement.

About company:
Flow&Ebb work with large corporates in the US and Europe to maximise the value achievable from their commodity price risk management activities.

We have two sides to how we help businesses:
• Consulting: Our consulting projects focus on how to set up hedging programmes, or improve existing activities, that reduce the risks created by volatile commodity prices. We are hands on in the implementation of such projects.
• Technology: The AMO platform provides the governance and compliance needed to actively manage price risk/ hedging programmes, in an automated, secure and simplified manner.

Contact Us:

Company Name: Flow&Ebb Ltd
Corporate Address: 18 Swan Court, 9 Tanner Street, London
Phone: +44 (0)20 3137 8838
Zip Code : SE1 3LE
Email: [email protected]
Website: www.flowandebb.com