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80 Percent of CPOs Believe Drought-Related Commodity Price Increases Will Last More Than a Year: A.T. Kearney Study

80 Percent of CPOs Believe Drought-Related Commodity Price Increases Will Last More Than a Year: A.T. Kearney Study

Food and beverage companies are looking for risk management strategies beyond hedging to manage commodity volatility

14 November 2012 (Chicago)—Today global management consulting firm A.T. Kearney released a report, Managing Supply in Volatile Agriculture Markets that summarizes the results of a survey of food and beverage company chief procurement officers (CPO). The study focused on how these executives and their companies are managing commodity risk in the face of rising commodity prices.

Although there is a well-known spike in agricultural commodity prices due to the recent drought in North America, the CPOs in the study do not expect commodity volatility to be a short-term phenomenon given global weather factors—hurricanes, tsunamis, floods, or drought—as well as increases in global demand for high-protein diets, geopolitical conflicts, and demand for biofuels.

Dave Donnan, A.T. Kearney partner and study co-leader said, "The survey results indicate that although financial hedging is widely used among consumer packaged goods companies, other initiatives are needed to plan for and mitigate volatility in agricultural commodities. These initiatives include formula flexibility for ingredients, total margin management, financial impact assessment, and dollar cost averaging."

A Framework for Managing Commodity Risk and Volatility

From A.T. Kearney's analysis of agricultural market dynamics, the firm suggests four tools to augment current commodity risk management practices.

  1. Hedging risk – Hedge positions in advance and manage portfolio risks.
  2. Deflect the risk – Share risk with retailers and use dynamic pricing strategies. Reduce costs via alternative specifications, sources or natural hedges and reduce demand for volatile commodities.
  3. Transfer the risk – Partner with suppliers to share the risk by locking in prices with long-term contracts.
  4. Operate the risk – Take advantage of value zones owning more of the upstream via agro-models and contract framing. Employ make-versus-buy strategies.

To read the full text of the study, Managing Supply in Volatile Agriculture Markets, please go to www.atkearney.com.

About A.T. Kearney

A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-term transformative advantage to clients. Since 1926, we have been trusted advisors on CEO-agenda issues to the world's leading organizations across all major industries and sectors. A.T. Kearney's offices are located in major business centers in 39 countries.

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