Commodity risk management seeks to identify the sources of any risks as a means of avoiding them or hedging them. Commodity risk sources are different for each market--financial, agricultural, energy--but all require management tools to optimize your trading. Commodity risk management consulting, depending on your portfolio, could be just what you need.

Commodity risk sources and management can be developed through your own research and use of risk management tools. Price volatility and supply availability are considered the basic risk factors in commodities trading. But managing commodity risk requires looking at more specific aspects related to price and supply.

1. If you are an investor or a commodity supplier, you need to identify your commodity risk sources. Different hedging strategies are necessary for investors and producers.

2. Do you feel you are capable of managing your commodities? Sometimes it is worthwhile to hire a commodities management consultant whose experience and expertise could give a good management plan to work with.

3. A commodity risk assessment should include assessing the risks that might develop out of the managing plans you are putting in place.

Action Steps
The best contacts and resources to help you get it done

Use commodity risk management to protect your investments

Commodities trading can be very profitable. It appeals to individual investors and corporations because it is less risky than playing the stock market. Risks in commodities appear more obvious and therefore easier to manage than stocks. Nevertheless, commodity risks are real. Even big corporations can gain from professional risk management consultants.

I recommend: If you are in the business of dealing with the actual commodities, then your risk management needs require an experienced risk management team. CPM Group is a consulting and risk management group that deals with suppliers and makers of commodities. Risk Management Commodities, Inc. works with energy, agriculture and finance commodities.

Identify your commodity risk sources

The general rule that price and supply are the two main risk factors in trading commodities has to be used more specifically to the commodity in question.

I recommend: Cargill Risk Management works with individual investors as well as institutions. Empire Futures Group is a brokerage firm that has online trading and research tools for managing risk.

Get as much information on managing commodities from as many sources as you can

It pays to research and get newsletters that cover your commodity or commodities, in order to make informed management decisions for your commodities.

I recommend: The Food Security Network is a resource for food-related commodities. It contains information on commodity risk management and has tools for assessment and monitoring and evaluating your commodities. Knowledge@Wharton is the website for the Wharton School, one of the premiere business colleges in the U.S. Here you can find articles on commodity risk management which can help you make informed management strategies.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Commodities risks can be controlled through strategic commodity management of the procurement of commodities. If you are a new investor, you should work with professionals or take classes so that you understand how to manage your investments.