Hedging commodities to protect market prices

Gin & Tonic

It’s been a devastating year for those dealing in citrus fruits. Unusually high temperatures during the flowering period in the key growing regions of Valencia and Malaga has affected pollination of crops and stunted flower growth in Spain. At the same time, an outbreak of citrus black spot on the Eastern Cape has delayed the picking season in South Africa. With crop yields falling in both regions, supply has shifted to Argentina, but torrential rains during the harvesting period there have led to severe disruptions and delayed seasonal shipping to European markets.

Together, it has been the perfect storm for citrus fruits, with crop yields down by more than 35 percent, their highest mark in eight years. Consequently, supermarkets in Europe have passed along their higher costs at the till, increasing consumer prices of lemons 25 percent from last year.[1]dailymail.co.uk/news/article-3614261/Lemon-shortage-forces-price-citrus-fruit-Britain.html Similarly, lime prices are skyrocketing as Mexico has been unable to meet excess demand and Brazilian traders have responded by placing a stranglehold over market prices, charging up to £2 per kg of limes.[2]telegraph.co.uk/news/2016/05/27/global-lemon-squeeze-causes-supermarket-prices-to-soar/

Lemons and limes may not seem all that interesting as one reaches for an afternoon snack, save for those suffering their way through the infamous Master Cleanse, but in fact they are used in large quantities on a daily basis by restaurants and bars in cocktails, sauces, and marinades. The current shortage has meant that those restaurateurs and bar owners buying on the open market will either be unable to source their requirements of citrus products, or pay dearly for the privilege.

However, for those buying from major wholesalers or cooperatives, it may just be that appropriate action was taken in the face of such a shortage and prices remained relatively steady. They may have protected prices in the event of an input shortfall. Specifically, they may have hedged revenues to protect themselves in the event of a price drop or lower volumes collected, knowing that the volume collection of a plant production of a cooperative varies each year depending on weather conditions observed during the growing season and that insufficient raw materials collected have multiple impacts, including volumes sold, on cost optimization of processing, and transportation.

Alternatively, they may cover themselves against rising prices for missing tonnes of commodities resulting from a failure of inputs. Finally, wholesalers or cooperatives may engage in a system of delegated management for situations when they subject to a risk of Volume x Price. In this case, if the average realized price is below the average price expected, they are covered for the decline in the average price of the yield.

With the aid of weather risk management specialists such as Meteo Protect, the wholesaler or cooperative thus compensates for production surcharges and ensures a stable revenue in performance and price. Their members, including restaurateurs and pub owners, hotels, healthcare, supermarkets and others can thus ensure they are protected from commodity price fluctuations. In turn, their customers are not affected by the vagaries of the market.

Thus, a restaurant will not have to take a hit on their profit margin when serving their signature peri-peri chicken, nor will a loyal pub customer sober up quickly in finding his favourite pub has doubled the price of a G&T. Because for every person who, when life gives them lemons, makes lemonade, there are those savvy businesses who, when life ups the prices of lemons, they enjoy the coverage of the lemon prices having been hedged.

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