For many businesses, commodity exposure is treated as a procurement issue.

Fuel is purchased. Energy contracts are negotiated. Raw materials are sourced. Prices move and margins absorb the difference.

But when commodity movements can materially change EBITDA, cash flow or pricing decisions, this is no longer simply procurement.

It is a strategic financial risk.

Do you actually know your exposure?

The first challenge is often visibility.

A transport business may understand how many litres of fuel it purchases, but can it quantify the financial impact of a 10%, 20% or 30% movement in price?

A manufacturer may know the cost of its raw materials, but how quickly can higher input costs be passed to customers?

An international business may have commodity exposure denominated in dollars while reporting and generating revenue in sterling or euros.

That creates another dimension entirely:

commodity risk and FX risk interacting with each other.

The board shouldn’t discover the significance of these exposures after margins have already moved.

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Start with the economics, not the hedge

A good commodity strategy doesn’t begin by asking:

What derivative should we use?

It starts with understanding the underlying business.

What commodities are we exposed to?

How much do we consume?

When do we purchase them?

In which currencies?

How volatile are those prices?

How much can be passed through to customers?

How quickly?

And what happens to EBITDA and cash if markets move significantly against us?

Only once that exposure is understood should the conversation move towards mitigation.

Not hedging is still a decision

Some businesses consciously choose not to hedge.

That can be perfectly rational.

But there is an important difference between accepting a risk and simply not managing it.

If a business chooses to remain exposed, leadership should understand the potential financial consequences.

Scenario modelling can make this remarkably clear.

What happens at:

+10% commodity prices?

+20%?

+30%?

What happens if the currency moves simultaneously?

What happens if customers resist price increases?

And at what point does the movement materially affect liquidity, covenants or profitability?

These are questions for the CFO and the board, not simply the purchasing department.

Hedging isn’t about beating the market

One of the biggest misconceptions about treasury is that successful hedging means achieving a better price than the market.

It doesn’t.

The objective is usually much simpler:

reduce uncertainty.

A well-designed hedging strategy can provide greater confidence around costs, margins and cash flow.

That can make forecasting more reliable.

It can support customer pricing decisions.

It can protect investment plans.

And it can prevent short-term market volatility from dictating long-term strategic decisions.

The objective isn’t speculation.

It is predictability.

Procurement and treasury need to talk

Commodity risk often sits across several parts of an organisation.

Procurement understands physical consumption.

Operations understands demand.

Sales understands pricing and customer contracts.

Finance understands margin and cash.

Treasury understands financial-market exposure.

The strongest approach connects them.

Because purchasing a commodity, pricing a customer contract, managing currency exposure and protecting margin are ultimately different parts of the same economic decision.

Volatility can create opportunity too

Risk management shouldn’t only be defensive.

Businesses with stronger visibility over their exposures can sometimes act when competitors cannot.

They may be able to lock in attractive economics.

Price contracts with greater confidence.

Protect margins while competitors remain exposed.

Negotiate differently with suppliers.

Or use periods of volatility to strengthen competitive positioning.

That is when treasury moves beyond risk management and begins contributing directly to enterprise value.

The board should know its position

Ultimately, commodity risk comes down to visibility, governance and informed decision-making.

A board should be able to answer three questions:

What are we exposed to?

What happens if the market moves against us?

What are we doing about it?

If those answers aren’t immediately clear, the business may be carrying more risk than leadership realises.

Commodity markets will move.

The strategic question is whether the business is prepared when they do.

LMC Advisory

Strategic Finance | Treasury | Leadership | Value Creation | Social Impact

Helping businesses understand financial exposures, strengthen treasury strategy and make better-informed decisions around risk, cash and enterprise value