Announcement
Market-based Commodity Price Risk Management
On-line course
July 7 - August 10, 2008
With financial support from:
The Bank-Netherlands Partnership Program (BNPP)
The Swiss State Secretariat for Economic Affairs (SECO)
The Ministry of Foreign Affairs of the Netherlands
The European Commission’s All ACP Agricultural Commodities Programme
Course Overview
This three-module course develops concepts and tools that are important for managing
commodity price risks in developing countries. The course reviews the role of commodity price
risk in business performance and economic development. It describes techniques for risk
assessment and reviews physical and financial strategies for managing risk. The course explains
futures and options contracts and presents information about the role of commodity exchange
markets. A variety of examples illustrate how futures and options contracts can be used to
manage different types of commodity price risk. Also discussed are the limitations of using
market-based instruments and the barriers to hedging in developing countries.
Three case studies are included to reinforce the concepts developed in the course. The first case
describes a Peruvian coffee cooperative that has implemented a price risk management strategy
using exchange-traded coffee futures contracts. The second case study describes the evolution
of a government program to manage maize import price risk in Malawi using physical call options
(i.e. options to buy maize product and have it delivered to Malawi). The third case examines the
development of the China Zhengzhou Commodity Exchange, the first ever futures market in
China.
The course focuses broadly on the issue of commodity price risk for agriculture and does not
examine in detail the recent rise in commodity food prices.
Module 1: Commodity Price Risk Assessment in Developing Countries
Module 1 focuses on identifying the scope and importance of the commodity price risk problem
and discussing techniques for assessing, monitoring, and managing the price risks faced by
individual producers, producer groups, banks, trading companies, and other firms operating in
commodity markets. Production and marketing of primary commodities play a dominant role in
most developing country economies and unpredictable fluctuations in commodity prices cause
various problems for actors throughout the supply chain.
Participants in the commodity supply chain are subject to financial risk due to both price risks and
physical risks to harvest quantity and quality. A variety of strategies exist for managing price risk.
Physical strategies such as open position monitoring, marking to market, and back-to-back
trading, can provide simple and effective reductions in risk exposure. Forward contracts can also
provide a flexible approach to managing price risk by offsetting an organization’s open positions.
Contract farming is a current trend in agricultural commodity production that reduces the price
risks for both producers and processors. These issues surrounding commodity risk and
management solutions are introduced in module 1.
Module 2: Commodity Price Risk Using Exchange-Traded Financial Contracts
Module 2 focuses on exchange-traded financial instruments, such as futures and options, and
examines how these can be used to reduce commodity price risks. Futures and options generate
important information about commodity market prices and allow participants in the commodity
supply chain to manage price risk exposure through hedging. Hedging is explained in this
module, along with the concepts of basis risk and physical position risk. The challenges faced by
exchange-traded financial contracts are also introduced and examples are included.
Module 3: The Role of Government in the Use of Market-Based Price Risk Management
This final section of the course (Module 3) focuses on the role of government in market-based
price risk management. It begins with a discussion of the barriers to effective hedging in
developing countries and how governments may be able to help overcome them. The module
then examines some of the benefits and costs of direct government hedging of physical market
positions when they are actively engaged in trading, pricing, or stockpiling commodities.
Governments can also use market-based risk management instruments to protect against shortrun food and humanitarian crises, but care must be taken not to crowd out private sector growth
and development. The course outlines how governments in developing countries can help
participants in the commodity supply chain implement hedging strategies by reducing key barriers
related to lack of knowledge, scale of production, access to credit, basis risk, and legal and
regulatory standards.
End of Course Project
The objectives of the end-of-course project are to solidify the concepts presented in the course
and apply these concepts to participants’ specific knowledge and experience. The exercise will
allow participants to explore the price risk assessment and price risk management strategies
used by (or available to) an organization operating in a commodity supply chain. Participants will
choose a specific commodity and base the assignment on a specific producer, trader, processor,
or government entity that operates in the supply chain of a particular commodity and country.
Information and data required to complete the case analysis may come from background
knowledge of the commodity supply chain and organization chosen, or from other public data
sources, such as the websites of commodity exchanges, firms, government, and/or international
organizations. Participants will be required to prepare a 10 single-spaced page paper following
the provided guidelines.
Course Contributors
Commodity Risk Management Group (CRMG),
Agricultural and Rural Development, the World bank
Julie Dana, Ornsaran Pomme Manuamorn, Roy Parizat
The World Bank Institute
Katalin Demeter, Etelka Kontrohr, Berna Yekeler
Michigan State University
Prof. Stephen D. Hanson, Prof. Robert J. Myers
Participants
Market-based Commodity Price Risk Management is a follow-up course to Innovative Market-based Risk
Management Framework. It introduces the concepts and tools for commodity risk management, applying
them to developing countries. This course targets government officials, staff of development agencies, aid
and relief organizations. It also has a special objective in reaching and communicating with important private
actors whose understanding and interest in the commodity price risk management discussed in this course
are essential in bringing the necessary private-sector participation.
Language
The language of the course is English.
Cost
No cost to participants.
Course Format
The course consists of three self-paced modules, discussion forums, reading assignments, case studies,
and knowledge tests. Each module is presented in narrated Power Point form. The narration lasts from
approximately 45-55 minutes for each presentation.
Course Expectations
Participants are expected to commit 10 -14 hours per week in order to gain the most out of this course, in
addition to:
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Completing the beginning of course assignment
Completing the required reading assignments
Participating in online discussion forums and knowledge checks. Participation involves posting a
minimum of two messages per week that are substantive in nature. The message can be either a
new topic or a reply to someone else’s message. Participants are encouraged to post more often
than twice a week in order to be involved more deeply into topics.
Completing assignments, an end of course project, and a final test
Completing course evaluation at the end of the course
System Requirements of the Course
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Hardware: Pentium 166 or faster, 64MB Memory, CD-ROM, Sound Card
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Software: Windows 95, 98, ME, NT 4, 2000, or XP Internet Explorer 4 or higher, Netscape 4 or
higher Microsoft Office 2000 (Word, PowerPoint) Acrobat Reader 5
Application
Interested participants can submit application through the following website:
http://info.worldbank.org/etools/wbi_learning/sec/app_form.cfm?sch_id=URB08-00-435
The application window is between June 1-25, 2008. Accepted participants will be notified by June 27,
2008. It is important that applicants provide a valid, correct e-mail address and mailing address. Please
note that PO BOX cannot be used as a mailing address for the purpose of receiving a CD ROM containing
course materials. Please also provide a phone number which is necessary for the WBI to send the CDs via
pouching services.
For more information
Please send an email to:
priceriskcourse@worldbank.org
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