Commodity risk refers to the uncertainties of future market value

Market value

Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...

s and of the size of the future income

Income

Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

, caused by the fluctuation in the prices of commodities

Commodity

In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

. These commodities may be grain

GRAIN

GRAIN is a small international non-profit organisation that works to support small farmers and social movements in their struggles for community-controlled and biodiversity-based food systems. Our support takes the form of independent research and analysis, networking at local, regional and...

s, metal

Metal

A metal , is an element, compound, or alloy that is a good conductor of both electricity and heat. Metals are usually malleable and shiny, that is they reflect most of incident light...

s, gas

Gas

Gas is one of the three classical states of matter . Near absolute zero, a substance exists as a solid. As heat is added to this substance it melts into a liquid at its melting point , boils into a gas at its boiling point, and if heated high enough would enter a plasma state in which the electrons...

, electricity

Electricity

Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...

 etc. A commodity enterprise needs to deal with the following kinds of risks:

• Price risk (Risk arising out of adverse movements in the world prices, exchange rates, basis between local and world prices)
• Quantity risk
• Cost risk (Input price risk)
• Political risk
  Political risk
  Political risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with reasoned foresight and investment....
  
  

Groups at Risk

There are broadly four categories of agents who face the commodities risk:

• Producers
  Production, costs, and pricing
  The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
  
   (farmers, plantation companies, and mining companies) face price risk, cost risk (on the prices of their inputs) and quantity risk
• Buyer
  Buyer
  When someone gets characterised by their role as buyer of certain assets, the term "buyer" gets new meaning:A "buyer" or merchandiser is a person who purchases finished goods, typically for resale, for a firm, government, or organization...
  
  s (cooperatives, commercial traders and trait ants) face price risk between the time of up-country purchase buying and sale, typically at the port, to an exporter.
• Exporters face the same risk between purchase at the port and sale in the destination market; and may also face political risks with regard to export licenses or foreign exchange conversion.
• Governments face price and quantity risk with regard to tax revenues, particularly where tax rates rise as commodity prices rise (generally the case with metals and energy exports) or if support or other payments depend on the level of commodity prices.

See also

• Fuel price risk management
  Fuel price risk management
  A specialization of both financial risk management and oil price analysis – and similar to conventional risk management practice – fuel price risk management is a continual cyclic process that includes risk assessment, risk decision making, and the implementation of risk controls...
  
  
• Sprott Molybdenum Participation Corporation
  Sprott Molybdenum Participation Corporation
  Sprott Molybdenum Participation Corporation was a dedicaded commodity hedge fund created in April 2007 by prominent Canadian investor Eric Sprott to invest in molybdenum assets. The primary investment objective of the Corporation was to achieve capital appreciation by investing in securities of...
  
  
• Uranium Participation Corporation
  Uranium Participation Corporation
  Uranium Participation Corporation is a Toronto-based holding company investing nearly all of its assets in uranium, both in the form of uranium oxide or uranium hexafluoride , with the primary investment objective of achieving capital appreciation in the value of its uranium holdings. The common...