What Is a Commodity Risk?

Commodity risk refers to the fluctuation of contract value related to commodities, including agricultural products, finance and energy commodities. Among them, there are large fluctuations in energy commodities, because energy commodity stocks are small, and fluctuations are easily affected by supply and demand.

Commodity risk

Right!

Commodity risk refers to the fluctuation of contract value related to commodities, including agricultural products, finance and energy commodities. Among them, there are large fluctuations in energy commodities, because energy commodity stocks are small, and fluctuations are easily affected by supply and demand.

Chinese name

Commodity risk

Definition

Fluctuations in contract value of commodities

Category

Economic terms

Be applicable

Commodity forwards, commodity futures, commodity swaps

The requirements for capital requirements for commodity risk apply to commodities, commodity forwards,

(1) Controlling risks through adequate risk assessment and using price and other means;

(2) Provide professional legal assistance to the insured when a civil compensation lawsuit occurs;

(3) Re-arrange the product properly.

Commodity risk management involves all strategies and specific policies to address previously unpredictable revenue issues. These strategies depend on the possible means available to the countries concerned. If no external safety net is available (in the form of possible means to obtain funds for free or as a loan or through the risk of transaction processing), then there are three ways to deal with risk. The first is to change risk by directly manipulating the markets that generate those risks. This approach to risk management is a major approach that has long been adopted in many countries, and is widely used in many countries, including many developed countries. International commodity management experience is disappointing and not a viable international alternative. Domestic commodity price control, either through trade policy or direct market intervention, has proved costly, either financially or from a development perspective. The reason is that this will almost inevitably distort long-term market signals, thereby affecting resource allocation and possibly adversely affecting development. Many developed countries have found that this approach is also costly.

The second way to deal with income risk is to adjust the degree of risk impact, that is, diversification. Increasing export diversification and reducing import dependence can reduce the impact of fluctuations in export income or rising import prices.

The third way to deal with income risk at the individual or national level is an insurance strategy or so-called risk management. At the micro level, these strategies primarily involve personal insurance by accumulating or reducing preventive stocks (cash or in-kind) or a common insurance network that can provide transfers when needed. At the macro level, corresponding strategies involve the accumulation or reduction of foreign exchange reserves at the individual country level, or reciprocal aid agreements between friendly governments (such agreements often include fees or insurance premiums).

The discussion above assumes that there is no external insurance system or safety net or entities (domestic individuals) exposed to commodity risks have no means of risk diversification available. However, this is not the case for entities in developed countries. Farmers and agricultural product consumers in developed countries (such as all agents in the sales chain) have a variety of market-based tools, with which they can manage the risks they face. For example, some agents that buy grain from farmers in the United States keep the value of the grain they buy from farmers in the futures or options markets. Similarly, international coffee and cocoa buyers manage their exposure to commodity risks in international futures markets. Producers and consumers in developed countries have developed advanced market-based risk management strategies to deal with commodity risks. The development of various financial instruments (futures, exchange of goods, etc.) in the past 20 years has increased the possibility of risk management means. The result is that agents in developed countries can trade at a price that reduces risk in organized markets and in over-the-counter markets with poor organization.

Although modern markets for risk management instruments are open to everyone, entities in developing countries are not actively using them. The reasons involve imperfect institutions and financial constraints. This means that assistance outside the country or domestic target commodity form associated with safety nets may not only be beneficial, but also beneficial to growth and poverty reduction. The World Bank-supported International Working Group on Commodity Risk Management recently sought to improve access to this risk management tool for developing country entities.