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How to stay ahead of commodity price fluctuations

How to stay ahead of commodity price fluctuations

Farmers, restaurant owners, bakeries and other businesses are constantly exposed to commodity price fluctuations that may affect cash flow and their ability to plan for the future. Some financial institutions offer commodity risk management plans that provide a guaranteed price for an agreed period, allowing more accurate budgeting. Here are some considerations to keep in mind as you navigate the tricky waters of commodity prices.

Assessing the impact

Many small businesses won’t need to do complex financial modelling to find out how commodity price (CP) changes could affect them – it could simply involve tweaking some numbers in a spreadsheet to see how other business finances would be impacted. You may also need to account for exchange rate fluctuations if you are trading overseas. Qualified insights from a trusted advisor can help you make sense of the impact as well. 

The effects of CP changes can be complex. If you are a seller, an increase can boost profits, but only if sales aren’t affected. If you are a buyer, a falling price might improve your cost margins, but put the supplier out of business. Ultimately, it’s better to plan ahead and look for ways to reduce your exposure to CP fluctuations.

Producer strategies

Primary producers can be vulnerable to commodity price drops. One useful strategy is to diversify output – for example, by rotating crops and livestock. In this case, it's a good idea to ensure that the alternatives are not exposed to similar price risks. There may also be interdependencies, such as volatile grain prices affecting livestock feeding.

It also pays to be flexible. For example, you might opt to grow produce in hot houses during the ‘offseason’ when supply is reduced and prices are higher. Another option to safeguard against CP fluctuations could be to sell to a buyer who can guarantee a set price, such as a cooperative (also known as ‘pooling’).  

Buyer strategies

If you're a commodity buyer, you may be able to reduce the impact of CP increases by negotiating a lower price if you purchase in bulk quantities. If this isn’t possible, you may need to find an alternative source.

Another tactic is to review the production process – for example, look for ways to replace expensive ingredients with cheaper alternatives. Another is to review the marketing and see if the product can be reduced in size and a better ‘value proposition’ found without causing customer dissatisfaction.

Commodity price fluctuations affect all types of businesses. These strategic approaches can protect profits, competitiveness and relationships with customers and suppliers.

Commodity prices can affect everyone, but making sure you have alternative options ready to slot into your supply chain can be a good safeguard to any changes down the line. Find out how to work with new suppliers.

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