October 8, 2024/liminalcomms.com

Below is a comment from Brian Quinn, Senior Vice President of Global Sales at Quor Group (formerly Brady), on the use of commodity hedging as elevated energy and base metal prices persist. Quor Group provides commodity trading and transaction risk management support to the global market:

“Increased commodity price volatility naturally heightens risk for manufacturers and producers who rely on these resources. While a well-planned hedging strategy can mitigate this risk, a poorly executed one can introduce new dangers.

In 2001, an airline that aggressively hedged crude oil below $20 was able to weather the price fluctuations during the Iraq War. In contrast, airlines that hedged with exchange futures and options in 2014, ahead of the 51% crude oil selloff, faced significant margin calls and cash flow pressures. Although they saved on future jet fuel purchases, the immediate margin payments drained cash reserves and, in some cases, led to additional borrowing. A more extreme example occurred in the 1990s, when US cotton producers, stopped out of their hedges at around $1.00 to $1.20 per pound, suffered devastating losses as cotton prices later plunged below $0.50 per pound. Hedging, particularly after extreme market volatility, can sometimes amplify risk.

Producers and manufacturers should avoid trying to time the market. Instead, combining strategies such as options, futures, over-the-counter swaps, and tailored exotic options can better manage the risk of a hedging program. Leveraging a Trading Risk Management application to understand the overall risk profile allows for more precise and effective hedging strategies.”