Commodity Price Risk

Everything you buy from a company is usually made out of raw materials or commodities. So when commodity prices rise and fall, it can make financial performance difficult for the companies that either produce or use these raw materials to make goods.

A good example of commodity price risk is how the rise of steel and aluminum prices will impact the cost of a new home, and the margins of the home builder. That uptick in those steel costs (driven by factors like demand, technology, regulations, or tariffs) and the related impact on margins...is what is called commodity price risk.

If you're paying attention, you’ll notice that commodity price risk is a very common excuse that companies offer when they fall short of quarterly revenue expectations, as very few people follow commodity prices on a day-to-day basis.

Companies do have the ability to hedge or lock in prices for raw materials ahead of times...both buyers and sellers of these raw materials. Which just means that they're not very good at predicting future raw material prices, like 99% of other human beings.