The Hedging Corner: Smart chocolate


In the previous Hedging Corner, we discussed how big banks made small fortunes by capitalizing on rising commodity prices while non-hedging manufacturers took a hit. Ironically, the big banks did the very things manufacturers are capable of doing. But that was the 1st quarter -- now what? Are commodities done punishing non-hedging manufacturers and their customers? Not according to smart hedger Nestle. Nestle sees commodity prices moving higher, but they're ready for that.

"A Nestlé executive said the Swiss food company is facing unprecedented increases in prices for raw materials and expects the situation to continue for the next few years. Kevin Petrie, Nestlé's head of procurement Tuesday, said speculators, weather conditions, and rising oil prices are ramping up the prices for cocoa, coffee, and other ingredients the food company uses in its products.

"In nominal terms, we are seeing unprecedented rises in the price of commodities," Mr. Petrie said at the company's annual investor seminar. "We see tremendous volatility and headwinds."

Nestlé has set up commodity research teams to identify trends, while the company uses futures contracts and hedging to lessen its exposure to price swings. "The tremendous volatility gives us an opportunity to take positions and cover the risks," Mr. Petrie said....
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