Fixed Prices Can Transfer Commodity Risk: A Hidden Cost of Procurement

Companies that negotiate fixed prices with suppliers may be transferring commodity risk without understanding its value. This risk can be managed through futures, swaps, options, forward purchases, or other hedging structures.

Large companies like Smithfield Foods and Ingredion use derivative instruments to hedge their commodity exposure. For example, Ingredion uses corn futures and option contracts alongside over-the-counter natural gas swaps to reduce volatility in its inputs.

The key is not just to eliminate the risk but also to understand who owns it. A supplier may manage the exposure through physical purchasing or hedging, while a buyer can separate the commodity from the conversion cost and hedge its own market exposure.

Procurement leaders should examine whether the fixed supplier price contains a transfer of commodity risk and evaluate its economics before automatically paying someone else to manage it.