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The Resource for the Global Finance Profession

AFP Introduces Commodity Risk Guide

  • By Staff Writers
  • Published: 2012-02-21

Commodity prices and volatility are issues that all corporates must consider carefully. Major commodity shifts can put incredible pressure on companies, and not all of those high costs can be passed along to consumers. While not all organizations can adopt sophisticated mechanisms of a pure commodity business, most organizations can take certain measures to improve their commodity risk analytics.

To help companies get a better grasp on the impact of commodity risks on earnings, AFP and Oliver Wyman have prepared the In Practice Guide: Six Steps to Assess Commodity Risk Exposure, and its supporting excel workbook. The guide is a companion piece to the October 2011 white paper, Volatility not Vulnerability, also published by AFP and Oliver Wyman.

The following is an excerpt from a recent Exchange article on commodity risk, written by Oliver Wyman's Graham Sharp and Alex Wittenberg, who contributed to the In Practice Guide:

Commodity prices and volatility

Commodity shocks are cutting into corporate profits and testing the abilities of even the best businesses to plan for and invest in the future. For example, the CEOs of consumer-facing companies as diverse as PepsiCo, Kraft, Kimberly-Clark, and Levi’s have said they expect commodity price inflation to pose a significant challenge to continued earnings growth over the next several years.

This volatility could persist for years due to long-term trends such as generally rising global resource demands. While companies in agri-processing, oil refining, and wholesale electricity generation have developed formal approaches to trading and risk management programs, the majority of companies need to do more—much more. Those in the middle of the value chain have a particularly tough challenge as they cannot easily raise prices to recover lost margins.

Given the likelihood of continued volatile commodity prices, every company needs to adopt a commodity risk management framework with a particular focus on robust analytics. If built around three pillars: Governance, Infrastructure, and Analytics, a robust framework will support both short-term tactical decisions and long-term strategic initiatives.


The new In Practice Guide is available here at AFP’s Risk Management Resource Center. AFP and Oliver Wyman have also prepared an accompanying webinar, Managing Commodity Price Volatility: Six steps for developing effective analytics, for Thursday, February 23, from 3:30 pm-4:30 pm.

 

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