Commodity Management Blog

Innovative Ideas and Thought Leadership for Volatile Commodity Marketplace

WheatI have seen a lot of press covering the recent report by the UN’s Food and Agriculture Organisation (FAO) noting that food prices have hit an all time high.

The FAO’s food price index, a basket tracking the wholesale cost of wheat, corn, rice, oilseeds, dairy products, sugar and meats, rose to 214.7 points which surpassed the previous record of 213.5 set in 2008 during the food crisis – remember riots in countries such as Egypt, Cameroon and Haiti.

The FT noted in an article that although food crises hit developing nations the hardest the “increase in food costs will also hit developed economies, with companies from McDonald’s to Kraft raising retail prices.”

But it was another policy brief about volatility in food prices by the FAO that caught my attention.  “Recent bouts of extreme price volatility in global agricultural markets portend rising and more frequent threats to world food security.”

High prices and extreme volatility are the double whammy for corporations that need to deliver steadily rising and forecastable earnings to investors.

If you look at the driving factors cited by the FAO for volatility, none of them are going away soon.  “Increased vulnerability is being triggered by an apparent increase in extreme weather events and a dependence on new exporting zones, where harvest outcomes are prone to weather vagaries; a greater reliance on international trade to meet food needs at the expense of stock holding; a growing demand for food commodities from other sectors, especially energy; and a faster transmission of macroeconomic factors onto commodity markets, including exchange rate volatility and monetary policy shifts, such as changing interest rate regimes.”

Volatility is here to stay.  Organizations with exposure to commodities (including energy) need to figure out how they will operate in a business environment marked by higher prices and extreme volatility.  Putting the correct solutions in place will give companies a big advantage relative to organizations that maintain the status quo.

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