Risk Management Should Be A Dinner Table Topic

Every day we read about the impacts of rising health care costs . . . from David Brooks’ recent article to the health care lobby’s perspective on the debt ceiling deal.  Health care is everywhere.

The impact of rising commodity prices, however is not.  A Financial Times article quoting General Mills CEO Ken Powell drives home the everyday importance of companies effectively managing their risk.

Mr. Powell called out ethanol subsidies for driving up food prices.  It is clear the subsidies have shifted corn production from export markets to domestic market consumption.  However, his statement at the end of the article was equally of interest.

Mr. Powell said other factors are also pushing food prices higher. He pointed to increased speculation causing volatility in food markets and greater wealth in emerging economies causing a shift in how people eat.

Emerging market trends are clearly influencing commodity prices.  Already this week we have seen China tap its pork reserves to relieve price pressure.  At a global level, it is not clear exactly what he means by speculation as a driver of price trends.

As we watch price discovery occur in the global market the need for companies to be able to manage their risk in an efficient manner will be critical to keeping consumer prices in check.  The Progressive Policy Institute, a left-leaning group, has also joined the fray and underscored this idea in a recently published study.

Lastly, protecting end-user companies from margin requirements can help protect another set of end users: consumers who need stable prices to plan vacations, buy groceries, or complete the multitude of daily tasks we all face.

End-user companies use derivatives to hold costs down in the face of unpredictable prices. Energy companies use derivatives to maintain stable electricity prices for homeowners. The agriculture industry uses them to ensure the price of grocery staples doesn’t fluctuate widely—which benefits families. Forcing end-user companies to meet margin requirements would either raise their costs or cause them to hedge less. In either scenario, the impacts will surely be passed along to consumers.

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