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Commodities Hedging - An Important Skill in Business

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Paul Liska is an experienced executive in the greater Chicago area with a long career working with some of the largest corporations in the world. Currently a private investor, Paul Liska has held senior and c-level positions at such companies as the Specialty Foods, Oscar Mayer Foods, and Kraft General Foods. In the latter two, his responsibilities included all aspects of financial planning including commodities hedging for the food giants.

Hedging is the process of mitigating risk through future agreements between two parties. For instance, farmers frequently agree to sell their upcoming harvest at a set price to avoid market vicissitudes when the harvests are coming in.

Hedging on commodities is a crucial skill in most industries that rely on large scale commodities trading. In the food industry, the price of feedstock can vary significantly in response to seasonal and environmental trends. Soybeans, for instance, see price spiking around harvest time, so knowing when to lock in a price both as a farmer and as a buyer is important to maintain reliable and cost-effective manufacturing.

An example of what the consequences of poor hedging can be is what happened in 2008 when the price of jet fuel spiked quickly and relatively unpredictably. Some smaller airlines were forced to file for bankruptcy protection and larger competitors posted significant losses for the period. Airlines that had long-standing practices of hedging, such as Southwest which has been hedging on fuel since 1999, benefited greatly during the period.