Hedging is not the only way to address volatility. A.T. Kearney research finds that an integrated approach to commodity risk management separates those who react to volatility from those who manage it.

When volatility hits the financial markets, investors shudder. When volatility hits the commodities markets, corporations shudder. The recent U.S. drought reinforced this message as it affected the price of corn, soybeans, animal feed, and other inputs to the food supply. The drought and its impact on future commodity prices are expected to have serious repercussions on all food prices.

We recently surveyed 21 chief procurement officers (CPOs) and heads of the commodity risk management functions of major food and beverage companies. This is the first in a series of studies to assess the impact of rising commodity prices and gauge corporate approaches to commodity risk management. Study participants were asked a range of questions, including: What impact is the rise in commodity prices having on your company? What are your expectations for the future? How do you approach and manage risk? How is your company positioned for the future if commodity prices remain volatile for the next several years?

Overall, our participants know that increased volatility in commodity pricing is not a short-term phenomenon. In a global marketplace, weather shocks—hurricanes, tsunamis, floods, or drought—are recurring events that will increase price volatility. Other factors such as increased global demand, geopolitical conflicts, and biofuels are causing a host of new headaches.

They have largely relied on hedging to manage their risk, maintain costs, and ensure a more predictable source of supply. Now, however, given the size and scope of the influencing factors and recognizing that commodity volatility cannot always be controlled, they say hedging alone is no longer a sufficient risk management approach.