Commodity Management Blog

Innovative Ideas and Thought Leadership for Volatile Commodity Marketplace

Michael SchwartzFord Motor Company reported 3rd quarter earnings and noted how commodity volatility hurt margins during its earnings’ call.

In fact, reported earnings were harmed both coming and going; as commodities rose in price and again as they came down.  Ford’s operating margin was down 1.4% from a year ago, and this “margin decline can be more than explained by higher commodity costs,” stated Lewis Booth, Ford’s Chief Financial Officer.  “Contribution costs, which include material cost, warranty expense and freight and duty, increased.  About 2/3 of the increase is due to commodities.”

Okay… margins hurt by rising commodity prices is a familiar story we see these days with manufacturing companies that haven’t yet adopted advanced commodity risk management techniques and processes.  But, in Ford’s case, their earnings were also hit as commodity prices came down.

“In addition to higher commodity cost compared to a year ago, we recognize the unfavorable mark-to-market adjustments of about $350 million on commodity hedges, driven by a sharp decline in commodity prices.”

Ford is not applying hedge accounting treatment so they recognize the loss on the financial instrument in the current period.  “These changes in market value do not have an immediate cash impact, although the change in value is reflected in current earnings.”

The exact problems noted in Ford’s earning conference call are the issues that Triple Point is solving for its clients. Commodity volatility has risen dramatically in the past few years and manufacturing companies need to adopt new techniques to manage commodity risk.  Triple Point introduced its Strategic Planning and Procurement (SPP) module to help manufacturing companies better track, measure, and control commodity risk.  In addition, Triple Point provides the most robust commodity hedge accounting solution.   As we’ve said on many occasion, this is not a wait and see problem.  Those that tackle commodity risk now will gain competitive advantage.

Read earnings call transcript –