Hedging is an essential tool for reducing financial risks associated with price fluctuations in the commodities market. In this scenario, hedge diversification is an even more robust and complete proposal that protects the operations of producers and consumers in multiple horizons.

In this text we will understand what hedge diversification is, its advantages for those who work with commodities, in addition to possible results. You will also see the importance of efficient planning and the role of qualified professionals. Enjoy the reading!

Read also:

• Risk Management in Times of Volatility: Expectations for 2025

Understanding Hedge Diversification

Hedge diversification is the use of different instruments to manage financial risk in the commodities market on multiple fronts. This strategy helps mitigate the impact of unexpected events, such as geopolitical tensions, climate change, or economic crises, while maintaining value stability.

With more complete hedging coverage, a company can have greater control over the variables that affect its earnings. In this case, instruments such as futures, swaps, vanilla options, barrier options, digital options, strip options, structures, etc. are allies. Below are examples of hedge diversification that can fit different situations and companies:

1. Short-, Medium- and Long-term Instruments:

Risk management professionals use a combination of financial instruments to provide protection at different points in the market cycle.

• Short-term: The focus is on stabilizing cash flows and protecting operating margins from immediate volatility, such as sudden changes in prices or demand.
• Medium-term: Hedge diversification makes the portfolio more resilient, improves the credit profile and provides greater confidence to make strategic investments.
• Long-term: In the long term, hedge management contributes to operational sustainability by mitigating structural risks such as changes in economic policies, sector crises or changes in the global climate scenario. It also strengthens competitiveness and the ability to plan for the long term.

2. Hedging for Importers and Exporters

Exchange rate and price volatility is one of the biggest challenges for companies operating in the international marketplace. Hedging diversification is critical to balancing these risks and protecting margins.

• Importers: Companies that rely on foreign inputs or goods can protect themselves against high commodity prices and currency devaluation, ensuring cost predictability.
• Exporters: By combining currency and commodity hedging, exporters can ensure the competitiveness of their products in foreign markets and protect their revenues from adverse fluctuations.

In both cases, tools such as currency forwards or swaps, futures option strategies and structured hedges can be used to preserve margins and minimize risk in volatile scenarios.

3. Linking hedging to logistics management

Aligning hedging with supply chain management provides an additional layer of protection, especially in markets that are highly dependent on critical inputs.

• A practical example: A soybean producer, for example, can use hedging to protect both the price of its production and the cost of key inputs, such as diesel for machinery or imported fertilizer.
• Benefits: This integrated approach reduces operational risk, increases cost predictability, and improves logistical efficiency. It also provides greater certainty when negotiating supply and transportation contracts.
• Tools used: Futures and options on energy commodities such as diesel or natural gas can be combined with traditional hedges to provide a comprehensive view of logistics risk management.

4. Combining hedging with productivity protection

Climate volatility is one of the biggest risks for agricultural producers. Combining traditional hedging with productivity protection tools increases financial security.

• Climate derivatives: Products such as contracts based on rainfall or temperature indexes help protect revenue in the event of extreme weather, such as drought or frost.
• Practical example: A corn grower can protect revenue from both falling market prices and productivity losses due to insufficient rainfall.
• Benefits: In addition to reducing financial risk, this strategy allows the producer to meet financial obligations and reinvest in the next crop, regardless of weather conditions.

Also read:

• The Role of Foreign Exchange Hedging in Foreign Trade Operations

Benefits of Hedging Diversification

Commodity prices in the market fluctuate due to supply, demand, weather and more. This volatility is not constant and changes over time. The IMF (International Monetary Fund) has kept a history of commodity price fluctuations since 1992.

The chart below shows the volatility of prices over the last 20 years:

Source: FMI

A study by McKinsey & Company shows that diversified hedging planning can reduce the volatility of the EBITDA margin (a financial measure of a company’s operating profitability) by 20% to 25% for companies that are highly dependent on commodities. This significant reduction in risk exposure underscores the value of a well-designed hedge.

See also:

• Hedging: A Guide to Understanding the Tool and Managing Risk

Integration with Other Risk Management Practices

In addition to diversified hedging, financial risk management must be accompanied by sound management and market analysis techniques. Comprehensive planning ensures benefits such as:

• Assessing the effectiveness of the hedging tools used;
• Simulation of scenarios;
• Prospects for the future of commodities;
• Price analysis and monitoring;
• Anticipating declines or increases in value;
• Support from qualified professionals;

At Hedgepoint Global Markets, companies and producers have access to comprehensive reports in the HUB, as well as hedging courses, market calls with in-depth professionals, and more. All of these resources are important for diversifying hedges and ensuring quality and security in your operations.

Market Intelligence in the Hedgepoint HUB

Check out the Hedgepoint HUB to see the aforementioned quotes and market analysis. The portal gives clients free access to all financial tools and reports. You can also register and try out the platform’s main features for free.

Disclaimer

This document has been prepared by Hedgepoint Global Markets LLC and its affiliates (“HPGM”) for informational and educational purposes only and is not intended to create any obligation or commitment on the part of any third party, nor is it intended to promote an offer or solicitation of an offer to buy or sell any securities, futures, options, currencies and swaps, or investment products. Hedgepoint Commodities LLC (“HPC”), a wholly owned subsidiary of HPGM, is an Introducing Broker and a registered member of the National Futures Association. Trading futures, options, currencies and swaps involves a substantial risk of loss and may not be suitable for all investors. Past performance is not necessarily a guide to future results. Hedgepoint clients should rely on their own independent judgment and the advice of outside advisors before entering into any transaction introduced by the firm. HPGM and its affiliates expressly disclaim any liability for any use of the information contained in this document that results in direct or indirect loss or damage of any kind. If your questions are not resolved by our customer service team ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878 8408/[email protected] (for clients in Brazil only).