According to a recent Reuters article, Singapore Airlines has announced it plans to retain a hedge that locked in the cost of two-thirds of its jet fuel requirements through the end of March 2015. Other airlines have removed their hedges. Whether you are an airline, a farmer, a manufacturer, or a mining operation, what are the consequences of unwinding a hedge early? Continue reading
Everyone I know is an energy user. When you’re a business, energy is often one of the more significant expenses reducing your profit. Farmers, fishermen, and trucking companies consume substantial amounts of diesel fuel and gasoline to power their equipment. Retail entities must run lights, air conditioning, and heating systems, perhaps even refrigeration units. Manufacturers are powering machinery and equipment every single shift. And real estate companies may incur utility costs, depending upon the lease agreements with their tenants. Any businesses with substantial travel budgets are impacted by the cost of jet fuel to airlines, as well as diesel and gasoline costs to power their own fleets. You might say money AND ENERGY make the world go round.
In the past six months, the cost of crude oil has dropped in half! Such a large price change in such a small timeframe suggests that new risks and opportunities abound for any business affected by energy prices. And who can think of any that aren’t impacted to some degree? The implosion in pricing means it is time to reassess your business’ energy risk profile.
Unless you’ve just crawled out from under a rock, you’re well aware that the price of oil has declined over the past six months and, with it, the cost of energy. You see it when you fill up your vehicle with gasoline or when you pay your fuel bill to heat your home (unless you’re among the unfortunate who locked in a fixed price before the recent price collapse).
If you run a business, you’re even more familiar with this price change, including its effects on your bottom line. The change has impacted producers, marketers, and users. However, just because prices have plummeted does not mean that risk–and opportunity–have vanished. That proverbial horse may already have left the barn, but there are more awaiting their own escape. If you have a future interest in a commodity, the uncertainty of its price will always present you with the counterbalancing risk/opportunity dynamic. Rather than simply wallowing in the anguish of lost profits–or basking in the glow of unexpected gains–perhaps it’s time to move on, to consider what opportunities this new pricing environment presents for the future.
Open Road Press is pleased to announce the release of Hedging Commodity Price RIsk: A Small Business Perspective by Tim Bishop. This ebook will help small businesses that can’t afford to hire staff specifically to manage their commodity price risk. It will also serve as a helpful guide to others who have an interest in hedging.
Hedging Commodity Price Risk explains:
– What commodity price risk is and how it can affect your business
– What hedging is and how it minimizes risk
– Specific hedging examples
– Hedging pitfalls and opportunities
– How to reduce exposure to rising interest rates
– How to protect against changes in foreign currency exchange rates
– How to hedge weather risk
Thank you to the many colleagues, family, and friends who helped make this possible.
I’ve been bicycle touring across America this summer with my lovely wife, Debbie. As you might imagine, we’ve cycled through many areas where farming is king. With gargantuan fields all around us, we knew we’d run into a few farmers! In Belgrade, Montana, just outside of Bozeman, we spoke at length with a dairy farmer. In Iowa, we spoke with a farming couple from South Dakota who grow soybeans and corn.
Our contacts with these farmers suggested that they were not hedging their businesses, but would like to better understand how hedging could help them. Our extended conversation with the South Dakota farmer and his wife really convinced us that farmers bear a lot of risk.
There’s currently a glut of corn on the market, which has caused a drop in price from $7 to $3 per bushel. They are looking at marketing their crops in China and India, where prices are much richer. However, they have a logistical problem. These markets are serviced by ships sailing from the US Pacific coast, and there’s no easy route to ship their grains from South Dakota to the Pacific. Rail cars headed west are hard to come by, thanks in part to this changing marketplace and the oil boom in North Dakota. Meanwhile, the crops can be stored indefinitely only if the weather cooperates.
Are you having trouble sleeping at night worrying about how commodity costs will affect your business? Would you like to offer your customers price protection but you don’t know how to manage the risk? Or, are you just tired of watching your annual earnings bounce with the whims of commodity prices?
Hedging Commodity Price Risk: A Small Business Perspective by Tim Bishop is an ebook that explains hedging in plain, easy-to-understand language with practical examples. It’s coming soon to an ebookseller near you! Expected publication date in the summer of 2014.
UPDATE: Hedging Commodity Price Risk was published in September of 2014. You can purchase it in the Open Road Press store.