Food companies purchase multiple commodities for their production processes. This includes for example sugar, corn, wheat, vegetable oils, milk and multiple ingredients. They demand price flexibility from their larger suppliers, resulting in contracts with new price indexations. When contracts include price indexations to traded commodities, financial risk management becomes inevitable. In addition, risk mitigation via (financial) hedging will become common practice. Sugar risk management is a hot topic for European industrial manufacturers.
It is complex to calculate the expected future cashflows for indexed contracts. KYOS has created a tailor-made solution for the industry to perform e.g. sugar risk management. Food companies have a variety of different contracts with multiple commodities and indexation rules. All contracts can easily be compared in the portfolio system and lead to the lowest costs and highest income. It will save time compared to an Excel based analysis.
Multiple category buyers profit from automated commodity market price analytical functions. The user is able to define a category specific portfolio of commodities. Even better: no more use of spreadsheets as all category buyers use the same integrated commodity risk management platform. Furthermore, the CPO has an up-to-date helicopter overview across all commodities, packaging material or ingredients.
The portfolio system allows a food producer to simulate potential future cash-flows. When industrial manufacturers have to make investment decisions then simulated feedstock prices are a key element. Especially when the required feedstock is flexible in terms of feedstock volume or the choice of the feedstock itself.
The higher and more frequent market prices move up or down, the higher its volatility. Volatility is often expressed in a percentage and can be calculated for interest rates, currencies (FX) and commodities. The calculated volatility however, does not say anything about the direction of the market price.
A highly volatile market price is not per definition a bad situation. It can depend on the companies activity and policy. For instance, trading companies might seek risky investments in highly volatile markets to maximize profits. On the other hand, industrial companies often feel more comfortable with less volatile contracts to minimize losses. The largest difference between these two sectors is that industrial companies often do not have a choice. The production process leads to a given fact to buy a quantity of the underlying commodity.
Finding a balance between fixed and floating prices is part of the hedging strategy of an industrial client. Fixed prices means that the cash-flow is secured for the commodities ordered but offers no possibility to profit from favorable price movements. An acceptable balance of fixed and floating prices depends on multiple factors. Clients can calculate the expected cash-flow using the KYOS cashflow@risk module. This gives clear insight in the expected cash-flows given any balance between fixed and floating prices. KYOS can deliver valuable advice regarding a sugar risk management policy.
Managing commodity risks is inevitable for industrial companies. Meanwhile, Excel has proven to be a pitfall for many companies in terms of costs, mistakes, hidden risks and potential fraud. KYOS software captures years of experience in managing risks of commodity contracts, volatility, hedging and market price analysis.
Timely insight in positions for multiple departments can therefore save millions rather than thousands per incident.
In multinational companies a consistent and compliant organization of (financial) reporting structures is safeguarded by ERP. Volatility of commodity prices however throws a spanner in the works. Unpredictable prices and volumes disrupt stable cash-flow predictions. In short, a proper risk management application can provide a structure to deal with these unwanted effects and provide a more predictable cash-flow and compliance in financial reporting.
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