Canadian Treasurer
 

December 1, 2011

Formal risk management approach needed to counter volatility in commodity prices, report

NEW YORK--Companies urgently need to develop infrastructure, governance, and analytical capabilities to manage their exposure to volatile commodity prices better, according to a new report released by Oliver Wyman in collaboration with the Association for Financial Professionals (AFP).

The report, entitled "Volatility, Not Vulnerability," predicts that commodity prices will remain volatile because of structural shifts in supply and demand on both a local and global scale. It concludes that companies can no longer afford to ride out cyclical changes in prices. Instead, they must establish short- and long-term commodity risk management strategies. The Oliver Wyman/AFP report:

  • Describes the short- and long-term trends driving volatile commodity prices and their impact on company earnings
  • Asserts that many companies outside energy and agribusiness do not have a clear sense of their net commodity exposure
  • Argues that companies with a formalized commodity risk management capability will have a competitive advantage over rivals who lack this level of insight
  • Encourages CFOs and CEOs to closely examine the impact of volatile commodity prices on their company's long-term strategies and viability

"Companies need to set up a formal commodity risk management program," says report co-author Alex Wittenberg, a Partner in Oliver Wyman's Global Risk & Trading consulting practice. "The impact of volatile commodity prices can no longer be managed within a single function as a cost or procurement issue if companies are to respond successfully to these long-term trends."

"Companies in all sectors must develop a clear commodity risk profile so that they can respond quickly to commodity price swings," adds co-author Michael Denton, a Partner in Oliver Wyman's Global Risk & Trading consulting practice. "For example, they may need to adopt a combination of product pricing, procurement contract structuring, and financial hedging capabilities. Some companies may also need a longer-term strategy that involves integrating up or down the value chain as a means to better managing volatile commodity prices."

"In talking with corporate treasurers across the country and across many industries, it's clear the extreme volatility in commodity prices is forcing treasurers and their companies to think differently about commodity risk," notes Craig Martin, Executive Director of AFP's Corporate Treasurers Council. "This paper makes a strong argument and lays out a valuable framework for managing these risks. This is the second in a series of risk management topics the AFP is covering in collaboration with Oliver Wyman, and we're thrilled to partner with a group with such deep expertise in risk management."

To download this report and explore Oliver Wyman's complete suite of content concerning managing volatile commodity prices, visit http://www.oliverwyman.com/commodity_volatility.htm

 

 

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