Effectively managing raw material price risk for consumers

Farmarco brings additional expertise and market insight to the table to assist consumers to effectively manage raw materials price risk. This external support can either complement existing management resources or provide the holistic management of commodity acquisition and pricing in its totality. Consultancies are provided both in physical markets and derivative markets. Farmarco’s depth of market knowledge and available support data allows for flexible, credible and timely presentation of advice/recommendations.

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Cash Commodity Markets and Physical Premiums (Basis)

Farmarco has unparalleled experience and a wealth of quality data on cash prices and physical premiums (basis) for various commodities. We provide support to procurement managers in sourcing commodities and negotiating competitive contract values and terms (specifically physical premiums or cash prices - using our extensive market knowledge and strong databases of physical premiums and cash values). Farmarco supports clients on issues that may arise as contracts are executed.

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Derivative Markets

Many raw material consumers have pursued transparent pricing arrangements for their raw materials against the major agricultural futures markets around the world. This approach makes supply chain costs very apparent but also brings the final pricing down to how well the price risk is managed in the relevant futures market.

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Finding adequate, suitable, market analysis, knowledge and strategic advice to manage the risk of highly volatile futures markets requires specific expertise.

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Farmarco’s expertise includes market intelligence, analysis and interpretation, market insight, strategy and tactical experience in order to develop a strategic approach to managing the derivative market side of raw materials price risk.

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Opportunity for better price risk management, as the traditional approach falters

Farmarco believes a specific focus on commodity price risk is more important than ever. A traditional approach for consumers has been to concentrate on operational activities. Price risk was managed by relying on low volatility in the commodity markets, the ability to absorb short term price spikes, or the ability to pass on raw material costs. Multi-commodity consumers tended to rely on their number of non- correlated commodities to manage their price risk.

In the past decade, this traditional approach has struggled with the heightened complexity and volatility in commodity markets. In addition, previously non-correlated commodities have seen at times sustained price rises simultaneously. The concentration of buyer’s power along supply chain has meant greater resistance to passing on cost increases, especially those related to raw material price rises.

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Farmarco spends considerable time and focus assisting clients to deal with these market changes. By developing holistic strategies to managing price risk, Farmarco supports a forward-looking raw material acquisition plan, concentrating on margin sustainability and procurement strategies that have more flexibility so that they can evolve with the commodity cycle.

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Strong Foundations

Farmarco’s philosophy is to ensure clients have strong commodity price risk management foundations. Many consultancies are executed with a substantial educational focus for both Board and Senior Management, including monthly Board meeting presentations and data for Board Papers.

For our corporate clients we perform various functions including:

• Developing and implementing Commodity Price Risk Management Policies and 

• Developing Procedural documents

• Board reporting. 

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Once-off Consultancies

Farmarco continues to provide once-off consultancy projects. Frequent requests include:

• Expert opinions

• Valuation of physical commodities

• Reviews of commodity price risk management systems

• Audits of price risk management policies and procedures

• Education programs focusing on managing price risk

• Specific market analysis projects on physical and derivative markets

• Industry studies