We received an e-mail yesterday from the team at Earthcare Garden Design in Wallington, U.K. He asked us how a business like his – A landscape design company – that doesn’t produce or mine commodities can benefit from trading on the commodities markets. It’s a great question, and there actually a few ways to do it.
Even though the company doesn’t deal directly with commodities, it will be affected by commodity prices.
Commodity price increases
The most obvious commodity that will affect them is the price of crude oil. When the price of crude oil increases, this brings up the price of petrol, which not only affects the team directly through increasing the price at their petrol pump, but it will also affect the price of their goods. Their suppliers will have to charge extra to pay for the extra cost in petrol for transportation of their goods.
In order to balance against this, if the team were to trade futures in oil, then this could balance the financial loss. If they were to trade the current price of oil for a year in the future, and the price of oil were to increase, they could then sell on the contract for a higher price than they bought it, which will give them some profit, which they then offset against the increased prices from suppliers etc. This way they lose less money from the rise in oil prices.
Another commodity that will affect them is certain metals and rocks. If a mining company suffers a setback and this affects the amount of metal mined, this will again raise prices. Once the prices have risen, this will increase the cost of their tools, and the materials they use to landscape gardens (slate/gravel/rock tiling etc.). They will then have to charge this increase in cost to their customer.
If they follow a similar process to that with the crude oil, by hedging on losing money from increased prices, then they can again offset the financial loss from an increase in mining costs.
Commodity Price decreases
What if the price of commodities they use goes the other way? For example, if a wood-producing company finds a new way to make wood-chopping more efficient, this will decrease the price of wood. This would then mean that potential customers could decide to buy the wood and install it themselves after getting a design from the company. In order to offset against this, the Earthcare team could buy stocks in wood chopping companies with the hope that one of the companies they invested in comes up with this new technique. The company’s value would rise dramatically due to their new abilities, which would gain the Earthcare team
In order to offset against this, the Earthcare team could buy stocks in wood chopping companies with the hope that one of the companies they invested in comes up with this new technique. The company’s value would rise dramatically due to their new abilities, which would gain the Earthcare team some profit in their stocks. This would again offset the financial loss from possible customers deciding to do some DIY.
It’s important to note in this scenario too, that their suppliers may also lower their prices, which would also save them money from any jobs they would do.
As you can see, trading on the commodities markets can benefit any company, as long as they buy from other companies and sell to consumers. Commodities affect everything down the financial chain, as they are the basis of all products and most services. If a company can strategize how different price variations would affect them, they can hedge against these situations occurring, which would stabilize their financial position and give them a place of stability from which they can scale their operations without fear of markets crashing bankrupting them.
As always, if you have any questions, get in touch with us!