Commodity Risk

Commodity risk is that type of risk, which indicates towards the uncertain conditions of the market values in the future and to the scale of income in the future as a result of the variations in the commodity prices.
The commodities, which face commodity risk, include metals, food grains, electricity, gas and many others.

A commodity provider or trader has to manage the following types of commodity risks:

Quantity risk
Political risk
Input price risk or cost risk
Price risk, which results from the adverse financial trends or changes in the foreign exchange rates, prices all over the world, as well as the base between world and domestic prices

The agents who have to deal with commodity risk can be broadly categorized into the following types:

Buyers or Purchasers (trait ants, commercial traders, and co-operatives) are exposed to price risk between the time period of buying and selling of midland or interior country purchase to an exporter, commonly at a port
Producers or Manufacturers (mining organizations, plantation organizations, and farmers) are exposed to cost risk (on raw material prices), price risk, as well as quantity risk
Governments are exposed to quantity risk and price risk regarding tax revenues, specifically when tax rates go up as the prices of the commodities go up (usually, this is noticed in energy and metal exports) or when payments or backing are dependent on the degree of commodity prices.
Exporters also are exposed to similar types of risk between buying at the port and selling in the designated location or market. They can also face the exposure to political risk regarding foreign currency changeover and export licenses.

 

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Last Updated on : 1st July 2013