In an era of volatility, leaders explore ways to manage price and supply risks in agricultural markets
2/29/2012 - Few understand the volatility of the commodities world quite as well as Steve Wilson
’74, chairman and CEO of CF Industries Holdings, Inc.
A global leader in the fertilizer business, CF Industries uses one commodity — natural gas — to foster the growth of agricultural commodities such as corn and wheat. As such, Wilson calls his Deerfield, Ill.-based company “a poster child for commodities risk.”
“And unfortunately, many of these risks are uncontrollable,” Wilson said, pointing to weather and government policies.
With global demand outpacing supply, and food costs increasing for both consumers and suppliers, agricultural commodities are in the spotlight around the globe.
On Feb. 21, the Kellogg Risk Summit explored ways to help market participants combat the chaotic price swings in commodities. The one-day program, sponsored by PRMIA, CME Group and the Zell Center for Risk Research, was hosted at CME’s downtown Chicago headquarters.
Successful risk management
Despite pricing challenges, CF Industries recorded all-time company highs in sales volume and net earnings in 2011. Wilson said CF Industries’ success lies in an effective risk management strategy that seeks to maximize and preserve margins by:
- Conserving the company’s capital structure with a well-capitalized balance sheet
- Installing communication that supports information gathering, sharing and decision-making
- Committing to operational execution, which includes nimble and flexible manufacturing, distribution and storage systems
- Practicing forward margin management, such as entering into natural gas hedges and forward sales
“The key is to protect ourselves on the downside and be positioned to succeed on the upside,” Wilson said, adding that successful commodity risk management drives positive financial performance.
The Kellogg Risk Summit attracted about 150 agricultural business professionals and Kellogg students. In addition to Wilson, speakers and panelists included:
Land O’ Lakes vice president of commodity risk management Susan Grelling, who opened the event with an industry perspective on price and supply risks in agricultural markets
CME Group managing director for agricultural commodities Tim Andriesen, who presented solutions for managing risk in agricultural markets
- Kellogg faculty member and associate director of the Zell Center For Risk Research Russell Walker ’06
- Kraft Foods senior director of commodities procurement – risk management Randy Masterman ’91