Moving Parts LLC
Commodity Risk Management
I have been blessed to have worked with and for many talented people! However, I have also been blessed to learn many things about the commodity business by making mistakes; “banging my head on the wall”, if you will! We all make mistakes, but whether those mistakes mark our failings OR drive our learning is the ultimate arbiter of their value; whether they are a “positive” or a “negative”. It is through both of these categories of learning that “Our philosophy” of managing commodity risk rests. The standard method of making strategy decisions in the commodity world has been to study the commodity in question, assess risk, produce a forecast of future price movements in said commodity, and then make a strategy decision based on that forecast. I.E. – If we forecast that prices will rise in the future, we contract now for our future needs, so as to forgo the higher costs that we have forecast are on the way.
This makes perfect sense. The only problem is that it doesn’t work! It never has worked. But why? For starters, like predicting the weather (which I have also noticed must not be that easy to do), predicting commodity prices requires predicting the outcomes of dozens of variables. To make matters worse, the importance of each variable also changes, depending on circumstances, that are also changing constantly. And speaking of variables, for most ag commodities especially, weather itself can be the most significant variable, during the planting & growing season, to correctly forecasting commodity prices. Said another way, “If you can’t predict the weather, you can’t predict corn (substitute specific commodity here) prices”!
So, what do we do? The two key words that answer this question are, “discipline & process”. First, you simply cannot allow yourself to produce a strategy that relies solely on your price forecast. This is not to imply that market analysis, intelligence and forecasting are of no value. However, you must rely of other factors when deciding on a course of action. We have developed a “decision matrix” that helps drive an effective, disciplined decision; one that will focus, first & foremost on protecting your businesses margins and profitability (more on that in the “Our Services” section).
Second, you must have a process in place to actively manage your commodity costs. Commodity prices cannot be managed passively. Managing commodity risk is much like fire prevention! If you wait until your building is fully engulfed in flames to consider putting in that smoke alarm and buying some extinguishers, its already too late and all that is left is dealing with the very-expensive damage that has already occurred. We have developed a proven, effective process for managing your commodity risk as well. Read more about that in the “Our Services” section.
- Dave Reeble, President & Founder