Price Wise: Resins Risk Management; Sunny D’s ‘Cadillac’

Greg Ogborn is the Director of Purchasing for Sunny Delight, and he took time out to answer some risk management questions:

Please tell our Price Wise readers about yourself and your role at Sunny D.

I'm the Director of Purchasing for Sunny Delight Beverages Co.  My team and I support all raw material and packaging Purchasing for 5 N.A. bottling plants

Unlike Sunny D, few processors hedge their resins price risk despite resin price volatility and the fact that resins comprise 50% or more of processing costs. Why is Sunny D different?

We've always been involved in commodity risk management, from corn to diesel fuel to natural gas and electricity.  Since resin is a major contributor to COGS; it's been my mission since joining Sunny to find a method of effectively, economically managing this risk.

What are your Objectives in hedging your resins prices?

Two words; price certainty.  But not price certainty at any cost; we weren't interested in paying 10 over the index; we wanted to own the index. 

You work in cooperation with your Finance Department, which means your CFO is on board with your activities. Was it difficult to get your CFO's approval and cooperation?

No, our entire Senior Leadership has always been supportive of the program because they are seeking price certainty.  We spend a significant amount of time developing our annual financial plans and those plans can be easily destroyed by a runaway resin market.  That can't happen anymore.

Does Sunny D have a Risk Management Policy that guides your hedging decisions?

Absolutely and it is very well defined; starting with a Board of Directors Resolution authorizing the activity.  It took time to develop and to get stake holder alignment, but is quite simple to administer.  The key to all trades is alignment and concurrence; I can't bid a pound without written approval from both the CEO and CFO.

What risk management tools (financial or physical) do you use to hedge your resins prices?

We utilize the PCW/CME Clearport MBN (ethylene) and HPE (high density polyethylene) futures swap. We negotiated these indices into our bottle contracts so that we have 100% correlation between our futures position and our bottle price change. These are excellent derivatives for our needs, but the challenge is visibility and market liquidity; we need more of both.

When your hedge positions show a mark-to-market profit, are you encouraged to "take the money"?

No, that action would be viewed as speculative.

What qualifications do you think a Risk Manager should have?

Thorough understanding of the market & tools, but of equal importance; have a clear objective.  Get over the natural desire to second guess your trades.  If you have a plan, the plan works and you've executed the plan; you've succeeded.

Is there anything else you would like to tell our readers?

Understand your liquidity. Establish your risk tolerance and determine what degree of market move your cash reserves can handle; keep your position within that tolerance.

Now that's risk management! I hope Greg and Sunny D are willing to share more thoughts and information in future Price Wise posts, but this brief Q&A is a window into "doing it right". Sunny D controls the resins market to meet its objectives. Its costs, sales, and profit margins are not controlled by it. They have a Cadillac risk management program and credit goes all the way to the top, but you don't need a Cadillac to move in the right direction.

Price Wise kudos to Sunny Delight; their drinks taste good, too!

About the author: Tom Langan of WTL Trading is a risk management consultant helping processors and suppliers control commodities costs, increase revenues, and secure and improve profit margins.