Hedging involves using simple financial tools like swaps, futures and options to mitigate price fluctuations in inputs (such as feed, fuel, and packaging) or outputs (like milk, butter, and powder). When market prices increase, the hedge can generate a payment to help cover the higher physical costs. Conversely, when prices fall, it provides budgeting certainty. The goal of hedging isn’t to “beat the market” but to stabilise cash flow, protect margins, and simplify planning, allowing you to concentrate on farming and processing rather than daily market fluctuations.

There are two primary hedging strategies, each serving an opposite need:

• The Short Hedge (For Sellers/Producers): This is the strategy used by producers (such as farmers, oil drillers, or mining companies), who want to protect against a price drop. They do this by selling a futures contract or buying a put option. This locks in a selling price for their future production.
• The Long Hedge (For Buyers/Consumers): This strategy is for consumers of commodities (think of airlines buying jet fuel or manufacturers buying metals), who need to protect against a price increase. They achieve this by buying a futures contract or a call option, thereby locking in a purchase price for a commodity they will need in the future.

This is a common misconception. For far too long, the benefits of hedging were reserved for large conglomerates and global blue chip companies, but now the game has changed. We see hedging as a leveller, allowing companies of all sizes to take a seat at the table. All companies are exposed to risk when trading in commodities, so why should these tools not be available to all businesses?

The key question is: Is the potential financial impact of a price swing large enough to threaten your profitability? If the answer is yes, hedging is worth considering, regardless of your company’s size.

Commodity markets are famously sensitive. The performance of your hedge will be influenced by the same factors that drive prices:

• Supply and Demand: The most fundamental driver. A poor harvest, a mine strike, or a factory shutdown can drastically reduce supply. Conversely, new technologies or changing consumer tastes can alter demand.
• Macroeconomic Trends: Interest rates, currency exchange rates, and overall economic growth can have a major impact.
• Geopolitical Events: Political instability, trade wars, and new regulations in key producing or consuming nations can send shockwaves through the market.
• Weather: Particularly crucial for agricultural commodities, where droughts, floods, or freezes can devastate supply.