For most people, that volatility is background noise. For food manufacturers, it’s a tiny piece of the entire problem that affects almost all their purchasing decisions.
The mixed bag of commodity volatility
Oil is the easiest commodity to watch because it moves in public, on a ticker, with headlines attached. However, it’s rarely the commodity doing the most damage to a food business’s margins.
Wheat, sugar, dairy and meat are all essential ingredients exposed to volatility, although each is driven by different market forces. A dry spring in one growing region or a change in export policy somewhere on the other side of the world, can quickly drive up the cost of a core ingredient, often before procurement teams have time to respond.
Recent grain-market movements underline how quickly those forces can pull in opposite directions. Prices have fallen as talks between Russia and Turkey raise the prospect of safer Black Sea shipping routes. This could bring more Russian and Ukrainian grain to the global market, increasing supply.
However, wheat is still being supported by strong demand for European exports. EU shipments are running ahead of previous seasons with buying interest from the Middle East and Africa helping support prices. Rapeseed and corn have also moved lower, while soybeans have edged higher on hopes of increased Chinese purchases of US supplies.
For manufacturers, uncertainty is the key challenge. While greater supply can push prices down, strong export demand and shifts in Chinese buying patterns can quickly drive them back up, making costs harder to predict and manage.
The link between commodity prices and margins is straightforward. If wheat becomes more expensive, so does flour. Then that added cost soon shows up across products from bread to batter. The same goes for dairy with higher milk, cream and cheese prices quickly feeding into production costs.
The real difficulty is timing. Many manufacturers agree retail prices months in advance, leaving little room to respond when ingredient costs suddenly rise. Until the next round of negotiations, they are often left to carry the extra cost themselves.
Most manufacturers aren’t exposed to a single commodity in isolation; they’re exposed to a basket of them, often moving for entirely unrelated reasons at the same time. A biscuit producer might be watching wheat, sugar and dairy simultaneously, each driven by different weather patterns, different export policies and different pockets of demand on the other side of the world.
None of those movements need to be dramatic on their own to add up to a meaningful hit once they land together. That’s what makes commodity exposure harder to manage than it first looks as it’s rarely one problem but several small ones arriving at once.
Why businesses react too late
The reason manufacturers only start thinking about this once the price has already jumped is partly due to resourcing. Managing commodity exposure properly needs a specific skill set and most food manufacturers, understandably, are built around production and supply chain expertise rather than financial risk management. There’s rarely a natural home for it inside the business. It sits somewhere between procurement and finance, and because it belongs to neither fully, it’s easy for it to fall through the gaps.
It’s also a matter of attention. When prices are calm, managing risk feels like solving a problem that doesn’t exist yet and there’s always something more immediate competing for time and budget. A price spike tends to get everyone’s attention only when it lands on the P&L. By that point, the business is scrambling to respond instead of planning ahead.
There’s also a simpler barrier: plenty of smaller and mid-sized manufacturers just don’t know these options exist. Forward purchasing and fixed-price agreements are one thing, but financial hedging in particular can feel like something reserved for large corporations with dedicated treasury teams.
Even when a business is aware of it, access is not always guaranteed. A lot of hedging tools and providers are built around a scale of volume that smaller manufacturers simply don’t hit, which leaves them managing exposure with none of the tools that bigger competitors have access to.
Practical ways to manage exposure
The good news is that none of the practical options here require building an in-house trading desk. Forward purchasing, agreeing to buy a set volume of an ingredient at a price agreed today for delivery later, is often the simplest starting point.
Many manufacturers already do a version of this without necessarily thinking of it as risk management. Fixed-price supplier agreements work similarly, giving cost certainty over a certain period in exchange for committing to a supplier rather than shopping the market month to month. Financial hedging uses instruments tied to the underlying commodity rather than the physical product itself, and therefore offers more flexibility.
In addition, it can be scaled to match the size of a business’s exposure, but it does need a level of understanding to use well. None of this depends on the size of a business, a smaller manufacturer just as easily has the option to hedge as a large one; it just needs to know it’s there and how to use it, without having to hire an in-house risk manager.
Looking ahead
Ultimately, these tools cannot change that commodity prices move. But what they do change is who is exposed and when. The businesses that come out of a volatile year in the strongest shape tend to be the ones that treated this as a standing part of how they run the business, rather than reacting to the latest headline in the news that week.
Food manufacturing already carries enough variables outside anyone’s control. Commodity price risk is one businesses can take steps to manage.
About the author
Tom Tapp is an agriculture and commodity hedging specialist at Attara.