Key points
- Define a coverage policy in advance rather than reacting to price moves.
- Contract structure allocates risk as much as timing does.
- Match ingredient cover to the period over which selling prices are fixed.
Coverage policy
A written policy setting minimum and maximum coverage per ingredient removes the need to make directional calls under pressure. Discretion should operate inside a band, not replace the band.
Structure and alignment
Fixed-price, formula-priced and index-linked contracts allocate exposure differently. The aim is to align the period for which ingredient cost is fixed with the period for which finished-feed prices are committed.
What to verify
- Written coverage policy with bands per ingredient
- Alignment between ingredient cover and finished-feed pricing commitments
- Contract pricing structures documented and understood by finance
Risks to manage
- Selling prices fixed while ingredient cost floats
- Reactive buying at market extremes
- Concentrated purchase timing in a volatile market
Common mistakes
- Treating procurement as a speculative function
- Fixing selling prices without fixing input cost
- Abandoning the coverage policy during a price spike
Frequently asked questions
Should feed buyers hedge financially?
Where liquid instruments exist for the underlying commodity and the organisation has the governance to manage them. For most operations, physical coverage policy and contract structure do the work.
How is coverage performance judged?
Against the market over the same period, not against a fixed budget. The relevant question is whether the outcome beat buying uniformly across the period.
Related reading
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