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20 April 2012 | Adam Leach
Food and consumer goods manufacturer Unilever follows a broad definition of the term commodity, applying risk management to anything with a “volatile pricing component”, according to its commodities chief.
Mark Taylor, vice-president of procurement and commodities at the business, told delegates at the Extended Supply Chain 2012 conference in London this week, although eggs are not usually treated as a commodity, Unilever does treat them this way.
“When you see eggs you don’t really think about it that much but how do you produce eggs?” he said. “You feed grain and seed to chickens so the price of grain and feed is a big determinant in the ultimate price of eggs. My reality is that anything that has a volatile pricing component in it can be classed as a commodity because we can apply our commodity risk management processes to handle the volatility that comes out of it.
“You can deal with that in two ways, you can carry on buying eggs on an outright price basis or you can make that grain exposure explicit and manage it yourself and that’s what we’ve tried to do,” he added.
Taylor explained in general, the company would look to manage its exposure directly with suppliers by locking down contracts. But he also highlighted strengths provided by derivatives trading. He said it offered a faster and more flexible method of execution - particularly useful in times of great volatility - improved transparency and improved insight through the involvement of brokers and banks.
However, it also requires extra resources, such as the back office function to handle trades and to recruit people with the right skills. Engaging in derivatives trading also adds complexity to the accounting process.
Taylor also identified strong governance, good market insight and business engagement as key factors in managing commodity risk.