Price Wise: Did your short bet pay off?

. Sunny D achieves price certainty using physical and financial tools (e.g. resins futures) that any processor can use, though it's clear most processors don't use them, given the low liquidity in resins futures and ongoing complaints about resin price volatility. Why? Are most processors willing to take more risk than Sunny D with resins prices? Ironically, yes, though they don't look at it that way.

To maintain utilization and sales, it is very difficult for processors to pass higher resins costs through to their customers. That means most processors have a short resins market position. Their profit margins decrease as resins prices increase, and profit margins increase as resins prices decrease. Such a short position is a de facto bet that resins prices will stay the same or decrease from current levels - not a smart bet for such a volatile commodity and major contributor to COGS, is it? Sunny D doesn't think so. If you do, consider ...

Are you unnecessarily betting against resins prices for your profit margins? As Greg said, "We spend a significant amount of time developing our annual financial plans and those plans can be easily destroyed by a runaway resin market." So Sunny D manages its resin prices. Join them, and leave the betting to traders.

About the author: Tom Langan dba WTL Trading is a risk management consultant helping processors control resins and others commodities costs, increase sales, and secure profit margins.