Here Comes the Business Commodities Rollercoaster Ride

Here Comes the Business Commodities Rollercoaster Ride

Notice how the price of gas seems to go up one week, down the next, only to rebound again? Global political instability, natural disasters, and economic uncertainty all lend a hand, but so does oil futures speculation. It wasn’t just coincidence that big banks were big speculators when crude oil prices went through the roof in 2008. Any company feels the effects of rising energy prices.

But people in business management are about to learn something they may not have covered when getting a business degree. Commodities of all types are about to become a target for wealthy investors according to a January survey. That could mean more volatile prices and greater difficulty in forecasting and controlling product and operating costs.

According to a survey by the Institute for Private Investors, 48 percent of respondents planned to increase commodity investments this year. The Institute surveyed its members, whose families have at least $30 million for investing. Of them, 40 percent have investable assets of $200 million or more. The term “commodities” in this case is a bit vague. That could mean oil, but also many other products, from metals to wheat.

Investment likely means futures or options, rather than wealthy people filling their basements with corn and hog bellies. It sounds innocent enough. To understand the potential impact, remember that at one time, the businesses that traded in commodities were generally big consumers of the commodities in question. The buyer looked for certainty in a market where commodity prices kept fluctuating.

Various financial derivatives products such as futures and options developed as ways that companies could lock in prices today for delivery at some later time, thereby hedging against sudden changes in costs. That is critical for many business models. As an example, the airlines industry often uses hedging strategies because jet fuel is a volatile commodity and it can be next to impossible to raise prices to consumers to offset rising prices. The futures markets were long dominated by producers and large corporate consumers of goods who sought predictability. But speculative investors are interested in profits, not predictability, because they make their money through arbitrage when markets shift. The bigger the change in prices, the bigger the profit potential. So speculators want changes to increase in size, rather than decrease.

It’s reasonable to assume that the more speculators participate in commodities markets, the more their actions will help reinforce price instability. As commodities markets become increasingly attractive to investors, companies that use those commodities might expect greater price fluctuations. Even if a business doesn’t directly use commodities, its suppliers might. Those in management should consider how their operational strategies might have to change in response.

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