By: Dan O’Reilly
Today I’d like to address a question that keeps coming up among prospective customers time and time again.
How do we work with Cargill Risk Management to hedge commodity price risk?
First, who works with us? The answer to this question is simple: Anyone whose margins are at risk from volatility in commodity markets. Typically, when prices are low, buyers of commodities will hedge to reduce their risk exposure as prices eventually increase. When prices are high, sellers of commodities hedge to lock in favorable prices which protect margins from lower prices. Our customers seek to reduce their financial and business risk by more effectively managing price risk and exposure.
What does the actual process of hedging with Cargill Risk Management look like? Great question. There are two ways we work with customers to provide price risk management solutions. The first way is embedded through the supply chain. This example with Jill the poultry buyer outlines the process well.
During my career with Cargill, I’ve worked with Jill – or someone like her – often.
In this example, on Jill’s behalf, Cargill Risk Management embeds the hedge into the physical meal contract. Her poultry business doesn’t tie up valuable working capital, as hedging on the Exchanges often does. Less work, and conceivably, less risk for Jill’s poultry business. Through an embedded risk management solution, Jill reduces the price she paid for soybean meal and values the ease of pricing her feed through one contract.
The second way to hedge your commodity price risk with us is through a direct financial agreement with Cargill’s swap dealer, Cargill Risk Management. There are many reasons a customer may choose to transact this way. Maybe you work with various suppliers of the physical commodity and you want one financial hedge provider to help manage the risk in aggregate.
Or maybe your business is exposed to many different commodities and you want greater control and flexibility over your hedge positions.
In other cases, the commodity you purchase is not available through Cargill. For example, Cargill doesn’t trade physical coffee; so, a coffee brewer doesn’t have the ability to embed a risk management solution into the contract agreement.
Here’s what this “direct” process would look like for this customer. Jenny is buying coffee beans for her roasting company and she’s seeking more predictable pricing over a specific time period. Through a customized structured product from Cargill, she’s managing her risk and protecting margins for her company.
The bottom line is, if you are selling or merchandising grain, roasting coffee, feeding cattle, powering a facility, mining copper or bottling beverages, when you partner with Cargill, you have access to risk management experts who understand your business objectives and help you find the right solutions for your business. And we’ll provide those solutions to you in the manner which best fits your needs and your business.