Price volatility? No problem. Price protection can be simpler than you think.

Q&A with Will Ormerod, VP Underwriting, Stable

Two thousand and twenty-two was a year marked by volatility, not the least of which impacted prices in the agricultural commodity space. While businesses without risk management programs may be looking for options to mitigate their price risk in the year ahead, the perception of risk management as an inherently complicated endeavor can be a big hurdle.

Stable’s VP of Underwriting, Will Ormerod, discusses this challenge with fellow colleague and Stable Market Reporter, Ingrid Lexova. The discussion has been edited for length and clarity. You can access a full replay of the conversation below.

[Ingrid Lexova] The topic of price risk management can seem daunting and complicated for people unfamiliar with it. So Will, for those who may find themselves in that position, how would you explain the concept of commodity price risk management?

[Will Ormerod] I think commodity price risk management is really a simple concept at heart. What it really boils down to is understanding the sensitivity of your business to fluctuations in commodity prices and instituting a program that brings that sensitivity into a range that you deem acceptable for your business.

The easiest way to explain this is with an example. Let’s say I’m a manufacturer of a product. I have a very good customer who wants to buy a long-term fixed price contract from me that I will deliver over the next 18 months. From my commercial business perspective, this might be really good for my business. I need the security of long-dated contracts to build my plant-running process around. However, in order to fulfill that contract I will need to buy raw materials over the lifetime of that contract in order to meet the terms that I’ve sold.

When pricing that contract, I’m effectively taking a view of the raw material cost. But what if my view is wrong? How wrong can I afford to be before that good contract starts becoming a bad contract and I start losing money? And ultimately, how wrong can I afford to be until my business is insolvent?

In this case, clearly the business needs to take some action to mitigate the risk. Depending on the market, there are lots of different ways that can be done.

[IL] Why might risk management be an important tool for businesses to implement as we look ahead to 2023 and beyond?

[WO] Anyone who’s been operating through the last few years will recognize that forecasting long-dated commodity prices is incredibly tough. When we look forward this year at what might play out in the 2023 landscape, we’ve got a tightening fair balance sheet and a strong dollar environment, but we’ve also got a reopening China, Russia-Ukraine supply shocks, potential environmental, weather-related, and disease risks in the market.

I don’t think anyone can possibly hope to forecast all these accurately when we’re talking even four to eight months out. The only thing we can be sure of is that we’ll continue to see volatility across markets and some of these factors—if they develop in a certain way—could have a material risk for your business.

So given that these risks exist and your business is sensitive to them, putting in place a plan that mitigates those risks and brings them into the range of acceptable tolerances is a vital thing for your business to be doing over the next year.

[IL] With that in mind, how does Stable fit into the picture for a business that may be looking to manage its risk exposure?

[WO] Firstly, Stable’s business premise was built around helping people manage risks in markets where there are very few other options. We specialize in markets where there are no liquid futures markets, e.g. avocados, organic grains, and specialist meat cuts.

Secondly, Stable offers a very targeted risk management program. We aren’t looking for one-off trades. Rather, we develop a program that fits alongside the needs of your business and is probably going to keep going for a very long period of time, year after year.

Thirdly, our programs incorporate a concept called optionality. It works like price insurance, reducing the impact of negative events on your business. If you’re sensitive to price increases, it will cap the exposure that your business holds in that direction and still enables you to benefit from positive market moves. So if a market falls, you can still buy at market price as that market drops. It’s a simple concept that removes a lot of the difficulties people experience with futures markets, margin accounts and the like.

* This article first appeared on Stable Insights where you can learn more about the impact from the cycle of volatility in commodity markets, and how businesses like yours are looking to solve this challenge. To learn more about Stable, speak to a Stable expert today.

ABOUT WILL ORMEROD

Will Ormerod joined Stable from Louis Dreyfus in Geneva to lead Stable's underwriting team. He works tirelessly behind the scenes with the risk solutions team to service clients, structure deals and manage Stable's risk.