--- title: What Is Commodity Risk? description: Commodity risk most commonly refers to price fluctuations for raw materials like steel, wood, gas, grains, coffee, and similar products. image: https://www.realized1031.com/hubfs/commrisk-1392453749.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # What Is Commodity Risk? Posted Jun 8, 2022 ![commrisk-1392453749](https://www.realized1031.com/hs-fs/hubfs/commrisk-1392453749.jpg?width=750&height=392&name=commrisk-1392453749.jpg) Commodity risk most commonly refers to price fluctuations for raw materials like steel, wood, gas, grains, coffee, and similar products. Price changes in either direction comprise a risk: a price increase is a risk for commodity buyers who use the materials to create their products. But for commodity producers, a price decrease is a risk. For example, if your company needs lumber to build homes or other products, the price increase can be a considerable risk. On the other hand, if reduced demand results in a price decrease, sellers (producers) risk losses. ### Recently, Commodity Prices Have Surged In 2021, many commodities experienced price increases, led by energy and metals. The historic lumber shortage of 2021 was created by a combination of several factors working together. First, sawmills cut production in 2020 at the onset of the pandemic due to concerns about a potential drop in demand for housing. Instead of a housing crash, demand soared. Interest rates stayed low, driving up prices as homebuyers looked for new construction and more room for their newly-necessary home offices. At the same time, Americans realized a sudden need to renovate, exacerbating the demand for lumber products. As a result, the cost of lumber shot from under $500 per thousand board feet in January 2020 to over $1,500 per thousand in May 2021. ### Commodity Price Swings Significantly Impact Company Earnings According to a study published by strategic consulting firm Oliver Wyman, commodity price volatility is the second-largest contributor to earnings uncertainty in publicly traded companies (with the largest being macroeconomic factors). In addition, raw materials comprise almost half the cost for consumer products companies, yet these expenses are traditionally difficult to control. Aside from the recent examples of wood and energy products, some commodities that are historically considered volatile include sugar, soybeans, coffee, and precious metals (notably gold and silver). ### What Causes Commodity Price Volatility? There is no single answer to the causation question. As you can see from the lumber example, several circumstances combined to create the perfect environment for a tremendous price increase. Other commodities react to different stimuli. For example, crude oil, one of the commodities most subject to price fluctuations, responds to supply and demand, political influences, seasonal demands, production changes, supply disruptions, global warming, and regional political conflicts. Cotton, which is relatively stable over time but experiences periodic sharp spikes, responds to other factors, including climate, oil prices, the dollar's value, the popularity of alternatives, and the status of stockpiles. ### Hedging Risk with Futures and Options Commodity producers, consumers, and investors in both types of companies are all interested in managing the risks associated with volatility. One way that some try to do so is by hedging their investment through futures and options. Buying [commodity futures](https://www.realized1031.com/blog/commodities-as-alternative-investments-what-you-need-to-know#sts=Futures) is speculative, with high risk and potentially high reward. A futures contract is a commitment to buy or sell a commodity at a set price on a specific date in the future. If you agree to purchase the product for less than the available price on that date, you can profit. Conversely, if you are committed to paying more than the price on that date, you incur a loss. In addition, futures can lock in a price for an expected purchase. Options give the investor the right to purchase at a specified price but carry no obligation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Trading futures involves the risk of loss and is not suitable for all investors. Please consider carefully whether futures are appropriate to your financial situation. Only risk capital should be used when trading futures. Investors could lose more than their initial investment. You must review customer account agreement prior to establishing an account.  Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition. Options are not suitable for all investors. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled "Characteristics and Risks of Standardized Options," which outlines the purposes and risks of option transactions. This booklet is available from your Financial Advisor or at [http://www.theocc.com/about/publications/character-risks.jsp](http://www.theocc.com/about/publications/character-risks.jsp).  Supporting documentation of claims will be supplied upon request. Discover Ways To Help Manage Risk In Your Investment Portfolio [![Discover Ways To Help Manage Risk In Your Investment Portfolio](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Risk-ebook-250.png?width=250&height=250&name=IPWM-Risk-ebook-250.png "Learn more about how to ...") ](https://www.realized1031.com/blog/what-is-commodity-risk#blogform) Download eBook ---   --- ### Discover Ways To Help Manage Risk In Your Investment Portfolio ![Discover Ways To Help Manage Risk In Your Investment Portfolio](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Risk-ebook-550.jpg?width=550&height=650&name=IPWM-Risk-ebook-550.jpg) Learn more about how to incorporate real estate investments into your risk management strategy By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Commodity risk most commonly refers to price fluctuations for raw materials like steel, wood, gas, grains, coffee, and similar products. Price changes in either direction comprise a risk: a price increase is a risk for commodity buyers who use the materials to create their products. But for commodity producers, a price decrease is a risk. For example, if your company needs lumber to build homes or other products, the price increase can be a considerable risk. On the other hand, if reduced demand results in a price decrease, sellers (producers) risk losses. Recently, Commodity Prices Have Surged In 2021, many commodities experienced price increases, led by energy and metals. The historic lumber shortage of 2021 was created by a combination of several factors working together. First, sawmills cut production in 2020 at the onset of the pandemic due to concerns about a potential drop in demand for housing. Instead of a housing crash, demand soared. Interest rates stayed low, driving up prices as homebuyers looked for new construction and more room for their newly-necessary home offices. At the same time, Americans realized a sudden need to renovate, exacerbating the demand for lumber products. As a result, the cost of lumber shot from under $500 per thousand board feet in January 2020 to over $1,500 per thousand in May 2021. Commodity Price Swings Significantly Impact Company Earnings According to a study published by strategic consulting firm Oliver Wyman, commodity price volatility is the second-largest contributor to earnings uncertainty in publicly traded companies (with the largest being macroeconomic factors). In addition, raw materials comprise almost half the cost for consumer products companies, yet these expenses are traditionally difficult to control. Aside from the recent examples of wood and energy products, some commodities that are historically considered volatile include sugar, soybeans, coffee, and precious metals (notably gold and silver). What Causes Commodity Price Volatility? There is no single answer to the causation question. As you can see from the lumber example, several circumstances combined to create the perfect environment for a tremendous price increase. Other commodities react to different stimuli. For example, crude oil, one of the commodities most subject to price fluctuations, responds to supply and demand, political influences, seasonal demands, production changes, supply disruptions, global warming, and regional political conflicts. Cotton, which is relatively stable over time but experiences periodic sharp spikes, responds to other factors, including climate, oil prices, the dollar's value, the popularity of alternatives, and the status of stockpiles. Hedging Risk with Futures and Options Commodity producers, consumers, and investors in both types of companies are all interested in managing the risks associated with volatility. One way that some try to do so is by hedging their investment through futures and options. Buying commodity futures is speculative, with high risk and potentially high reward. A futures contract is a commitment to buy or sell a commodity at a set price on a specific date in the future. If you agree to purchase the product for less than the available price on that date, you can profit. Conversely, if you are committed to paying more than the price on that date, you incur a loss. In addition, futures can lock in a price for an expected purchase. Options give the investor the right to purchase at a specified price but carry no obligation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Trading futures involves the risk of loss and is not suitable for all investors. Please consider carefully whether futures are appropriate to your financial situation. Only risk capital should be used when trading futures. Investors could lose more than their initial investment. You must review customer account agreement prior to establishing an account. Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition. Options are not suitable for all investors. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled \"Characteristics and Risks of Standardized Options,\" which outlines the purposes and risks of option transactions. This booklet is available from your Financial Advisor or at http://www.theocc.com/about/publications/character-risks.jsp. Supporting documentation of claims will be supplied upon request.", "articleSection" : [ "Risk" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-06-09T00:00:00+0000", "datePublished" : "2022-06-09T00:00:00+0000", "description" : "Commodity risk most commonly refers to price fluctuations for raw materials like steel, wood, gas, grains, coffee, and similar products. ", "headline" : "What Is Commodity Risk?", "image" : { "@type" : "ImageObject", "height" : 392, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/commrisk-1392453749.jpg", "width" : 750 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/what-is-commodity-risk", "name" : "What Is Commodity Risk?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/commrisk-1392453749.jpg" } ```