Commodity Price-Risk management is an activity frequently delegated to the CFO or the Treasurer, who report to CEO and Board on a periodical basis.

Information surrounding this activity is usually very technical and management reports hover around KPIs that are difficult to understood, in particular for the decision makers. Terms like Gamma or Greeks, Portfolio V@R, Volatility or Correlation are not uncommon, which at the end have little meaning to top Management and Directors.

Traditional risk management strategy and tactics are frequently based on complex derivative structures, not necessarily fully understood by buyers or sellers. Corridors, Accumulators, or Butterflies (flying backwards in circles!) are some of the fancier products circulating around, some of them even with adverse impact to companies financials.

Strategic Price-Risk Management starts with the overall understanding of the financial position of the enterprise, measured on concrete management indicators like CONSOLIDATED EBITDA or Free Cash Flow.

This understanding stems from the concrete identification of the actual risk factors (financial and operational) the company is exposed to, and their meaningful and material impact on company CONSOLIDATED results.

The next step should be to visualize this impact so that extreme values can be properly understood. Only then should the organization design and implement strategies to properly manage commodity price risk.

Management metrics and KPIs for this strategies should be at the corporate level and measured on hi-level variables like EBITDA or Free Cash Flow, on top of the technical metrics risk managers use in their day to day job.

Following this roadmap, a company can avoid typical pitfalls and costly mistakes managing and hedging price risk. Some case studies:

• Hedging both LONG and SHORT positions of the same commodity, on a company with many locations distributed geographically. This is costly and inefficient, since only the net exposure should be managed allowing the LONG and SHORT position of the commodity naturally hedge. FX risk commonly falls under this category.

• Hedging a commodity that doesn't have a material impact on the results of the company. For example, a pharmaceutical lab buys a considerable amount of sugar for pill coating, and establishes a price risk management operation for it, even if the financial impact on its EBITDA is meaningless. As opposed to a soft drink producer, where sugar represents easily 60% of the overall cot structure.

• Hedging a commodity even if the extreme expected negative impact of it on EBITDA does not imply a significant risk for the overall financial position of the company. In this case the company is in a better position if it remains naturally exposed to the price volatility of the commodity, avoiding hedging costs and opening up to potential upsides.