Commodity Risk Management

Commodity risk management is very important to provide coverage to all those groups that are related to the commodity market. These groups are exposed to maximum financial risks when there is any natural disaster or man-made disturbance.
Commodity market in every country faces some of the common risks.These risks are caused by natural disaster as well as external factors like wars, political instability and so on. If not covered properly, these risks can cause huge financial loss to a number of groups.

Proper commodity risk management is essential to provide stability to this sector as well as to make this sector financially secured.

Types of Commodity Risk
There are different types of commodity risk that are faced by the commodity markets across the world.
These risks are as follows:
Natural Risks: Natural disasters
Man-Made Risks: Political risks, price risks, quantity risks and so on
Groups Facing Commodity Risk
There are a number of groups that mostly face the commodity risk. Primarily there are the farmers, producers and plantation companies who face these risks. At the same time, the purchasers and exporters of commodities also come under the shadow of commodity risk. Last but not the least, is the national governments that are also bound to share these risks with others.
Services Offered by Commodity Risk Management Firms
There are several firms that are related to the management of commodity risks.

Some of the services offered by these firms are the following:

Weather Risk Management:
The weather risks are very important for the farmers, plantation companies and the exporters. Heavy rain, drought, cyclones or other types of natural disaster cause huge harm to several groups. These groups need sufficient coverage against the natural disasters to remain financially secured. There are a number of insurance products offered to cover these risks. These are self insurance, crop insurance, index based insurance and many more.

Price Risk Management:
There have been a number of incidents where crop prices have fallen suddenly because of over-production or something else. In these situations the farmers and plantation companies face huge financial losses. At the same time, there are many farmers who borrow from banks and other financial organizations for farming. These people are exposed to maximum risk due to the price volatility. As a part of commodity risk management, many firms are offering insurance products as well as other instruments to provide security to these people. The national governments also try to control the market volatility as much as possible. At the same time, there are many countries that offer guaranteed minimum income for a number of crops.

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Last Updated on : 8th July 2013