Top 7 Advantages of Hedging Physical Commodities

Physical commodities are still in solid demand in today’s trading world. Even today, people are still adding them to their portfolios because of the age-old “supply and demand”. People want something and there may be enough of a commodity to meet it.

When this happens, money gets moved around. Businesses benefit and so do investors. But what if the businesses want to hedge?

This guide will go over the top seven benefits that a business gets to enjoy hedging physical commodities. If you’re a business owner considering the idea and sitting on the fence, this guide should help drive you to make a final decision. Let’s talk about the following advantages now.

1. Risk mitigation and stability

To begin, let’s discuss the primary advantage that is being able to mitigate risk while bringing stability. One of the things you need to understand about the commodities market is that it has price volatility that is influenced by various factors. These include but are not limited to weather conditions, geopolitical events, and global economic trends.

A hurricane that threatens the United States could harm certain physical commodities known to originate from that specific area. Ongoing tension and conflict of a certain region of the globe could cause prices of another commodity to be on constant shaky ground. For these reasons, it’s important for one hedging physical commodities to stay informed by way of their favorite news outlets.

When hedging, you’re protecting yourself from these price movements that are adverse. As a result, you’ll be able to stabilize your financial outlook. Still, due diligence reigns supreme in terms of choosing a physical commodity.

2. Price certainty for producers

Producers of physical commodities may be concerned by the prospect of price uncertainty. Take agricultural producers for instance. The factors where price changes can play a role include but are not limited to the fluctuation of global demand and weather patterns.

If producers hedge their positions, they can lock in their prices for future produce. Meanwhile, this will safeguard themselves against potential losses if the market conditions are unfavorable. Once they are certain of the price, they can forge ahead by adjusting their overall budget and planning strategy - keeping them in business longer rather than see it get wiped out over things they will never have control over.

3. Supply chain management

Supply chain management is vital for every business - especially those connected to physical commodities. Companies can stabilize their supply chain while maintaining their cost-efficiency intentions by hedging since it will allow them to align their procurement and production processes based on market dynamics.

Businesses can breathe a little easier knowing their operations will not face disruptions and things continue on like any other day at the office. The more informed you are about possible impending situations that affect the commodities market, the better. This applies so much to your supply chain.

4. Better financing opportunities

Hedging physical commodities will also better a business’s financing opportunities. Lenders and other financial institutions see hedged positions in a favorable light since they represent a proactive approach to managing risk. A business can enjoy various benefits regarding their financing opportunities such as improved credit, better chances of locking in more capital for investing in their business further, and more.

Imagine reaping the rewards of hedging, only to take your business to new heights. Things may be looking up for you, even if the market for certain commodities appears shaky.

5. Portfolio diversification

Portfolio diversification is one of the best ways to make overall investing a success. Especially when it comes to long-term financial growth. Hedging physical commodities will also help make diversification possible.

With commodities, you have that additional layer added to your overall portfolio. Hedging them will reduce risk along with giving you the potential for more returns. You can benefit even in times when the global economy faces an uncertain future.

6. Speculative opportunities

Hedging may also be beneficial for those looking for speculative opportunities. If you correctly predict the movements of a market, you can benefit from the price fluctuations that occur. Mitigating risk and using hedging as a speculative strategy will make it even more rewarding for a wide range of prospective market participants.

Whether you’re an individual investor or a commodity producer, this is one more reason why hedging can work to your advantage. Even if you’re not someone who is good at predicting the market, at least you can use it to protect yourself from any financial worries that affect you personally.

7. It’s an insurance policy against uncertain events

There are many uncertain events that we have no control over. Some of them can be within control assuming you’re a world leader. Whether it’s natural disasters, geopolitical events, or something we never see coming - just know that hedging commodities will be your best insurance policy against them all.

For example, the Middle East is a region where tension can seem like the norm. Therefore, you may expect disruptions of its oil supply chain if something big happens. As such, hedging the commodity will give you an insurance policy that will protect you from financial loss.

What can go wrong, may and will go wrong. The real question is: who is protected from it? If you have yet to hedge physical commodities knowing full well of the possible situations that may derail you financially, do so as soon as possible.

Let PermuTrade work with you on physical commodities

When it comes to physical commodities, PermuTrade will have your bases covered. We understand them well enough to help others who are looking to hedge them. If you are considering the idea of adding them to your portfolio, we’ll be happy to help with putting together a strategy that will align with your financial goals.

Hedging physical commodities will provide you with the seven benefits we’ve just listed above. Is that enough for you to get started? If the answer is “yes”, contact PermuTrade today and we’ll get you started on the right path.