What are the types of commodity risk?

Commodity risk refers to the uncertainties of future market values and of the size of the future income which is caused by the fluctuation in the prices of commodities.

Types of commodity risks:

  • Price risk: It arises from an adverse movement in the price of a commodity as determined by forces outside the control of the organization.
  • Quantity risk: It arises from changes in the availability of commodities.
  • Cost (input) risk: It arises when adverse movements in the price of commodities impact business costs.
  • Political risk: It arises from compliance or regulation impacts on price or supply of commodities.

A business should consider managing commodity risks where fluctuations in commodity pricing and/or supply may impact on the business’s profitability.