Commodity risk refers to the uncertainties of future

market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...

s and of the size of the future

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...

, caused by the fluctuation in the prices of

commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a comm ...

. These commodities may be

grain A grain is a small, hard, dry fruit (caryopsis) – with or without an attached hull layer – harvested for human or animal consumption. A grain crop is a grain-producing plant. The two main types of commercial grain crops are cereals and legum ...

metal A metal (from Greek μέταλλον ''métallon'', "mine, quarry, metal") is a material that, when freshly prepared, polished, or fractured, shows a lustrous appearance, and conducts electricity and heat relatively well. Metals are typicall ...

gas Gas is one of the four fundamental states of matter (the others being solid, liquid, and plasma). A pure gas may be made up of individual atoms (e.g. a noble gas like neon), elemental molecules made from one type of atom (e.g. oxygen), or ...

electricity Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as described ...

etc. A commodity enterprise needs to deal with the following kinds of risks: *

Price risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...

is arising out of adverse movements in the world prices, exchange rates, basis between local and world prices. The related

price area risk An electricity price area is a zone throughout which the electricity is traded at the ''same'' spot price on a power exchange. An electricity price area is decided by transmission system operator and can be a whole country, or parts of it. EPAD ...

usually has a rather minor impact. * Quantity or volume risk *

Cost risk A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...

(Input price risk) *

Political risk Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Po ...

Groups at risk

There are broadly four categories of agents who face the commodities risk: *

Producers Producer or producers may refer to: Occupations *Producer (agriculture), a farm operator *A stakeholder of economic production *Film producer, supervises the making of films **Executive producer, contributes to a film's budget and usually does not ...

(farmers, plantation companies, and mining companies) face price risk, cost risk (on the prices of their inputs) and quantity risk *

Buyer Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or serv ...

s (cooperatives, commercial traders and trait ants) face price risk between the time of up-country purchase buying and sale, typically at the port, to an exporter. *

Exporter An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is an ...

s face the same risk between purchase at the port and sale in the destination market; and may also face political risks with regard to export licenses or foreign exchange conversion. *

Governments A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...

face price and quantity risk with regard to tax revenues, particularly where tax rates rise as commodity prices rise (generally the case with metals and energy exports) or if support or other payments depend on the level of commodity prices.

References

External links

Understanding Derivatives: Markets and Infrastructure
Federal Reserve Bank of Chicago, Financial Markets Group

{{Financial risk Market risk

Risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...

Groups at risk

See also

References

External links