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Consumer-Package Goods Brand Counters Unprecedented Volatility with CTRM
MARKETS: MANUFACTURING | COMMODITY: INGREDIENTS, NATURAL GAS, DIESEL, ALUMINUM | CLIENT: CONSUMER PACKAGED GOODS

 

Situation

In response to unprecedented volatility in commodity ingredient prices, a leading Consumer-Packaged Goods (CPG) Company needed to initiate a hedging program for ingredients and other commodity requirements the company procures. Commodity volatility severely hampered the ability of Senior Executives to forecast corporate-wide Earnings Per Share (EPS) accurately. In addition, this CPG Company manages over 1B dollars of commodity purchases annually, which means the cost variance can be astronomical.

The company's hedge program initially included wheat, soy oil, soy meal, corn, cocoa, and butter, hedged primarily using futures and options exchanges. Subsequently, the company added natural gas, diesel, and aluminum hedging. The company wanted ultimate flexibility to manage the company's rapidly growing hedge program and an assortment of commodities. Therefore, the company required a Commodity Trading and Risk Management (CTRM) tool that could tie commodity ingredient forecasts with the company's derivative hedges and enable the company to visualize the company's "percentage hedge" coverage properly. 

 

Solution

This CPG Company implemented and leveraged the AEGIS CTRM to quickly input broker positions, reconcile, and run risk scenarios on unhedged portions of the company’s forecasts. This functionality enabled the company to instantly understand the company’s market positions, providing the company more time to perform deeper analysis to improve the company’s weighted average hedge rate. The company also transacted Over the Counter (OTC) and exchanged hedges to improve trade execution and enhance the hedge program's flexibility. 

In addition, the AEGIS CTRM also accommodates the company’s 4-4-5 accounting cycle and reports within an aggressive timeline. The CTRM’s flexibility was invaluable as the company continued navigating an ever-changing, volatile commodity marketplace and the complex reporting and forecasting needs of internal and external shareholders.

Outcome

As a result of the partnership with AEGIS, this CPG Company decreased EPS volatility and improved its hedge program results. The company has since designated some hedges as cash flow hedges, then processed within the AEGIS CTRM. This process designation reduced errors in the complex accounting standard and mitigated earnings volatility to other comprehensive income.

In addition, the processes utilized by the CPG company came with workflows and approval processes across multiple departments, which aligned with Sarbanes Oxley requirements. Recently, the company decided to take advantage of AEGIS' API upgrade, allowing the company to extract market and transaction data seamlessly. The API integration will further improve the company's capabilities and eliminate time-consuming manual reports. 

 

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This case study is not indicative of future performance or success. Commodity interest trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Hedge advisory services are performed by the registered commodity trading advisor AEGIS-CTA, LLC, a wholly-owned subsidiary of AEGIS Hedging Solutions, LLC. This case study is not required to be and has not been, filed with the Commodity Futures Trading Commission ("CFTC"). The CFTC does not pass upon the adequacy or accuracy of this commodity trading advisor disclosure. Consequently, the CFTC has not reviewed or approved this case study.

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