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Food firms managing commodity risk

London, 26 May 2011

Food manufacturers are investing more in commodity price risk management, due to volatile markets and shareholder sensitivity to rising raw material costs eroding profits, a top Unilever Plc manager told Reuters.

Teams dedicated to managing the risks of buying commodities including vegetable oils, cocoa, sugar and grains are a new addition to procurement departments, said Simon Shaw, global commodity risk management director at Unilever.

Unilever added its own team around 18 months ago, Shaw said on the sidelines of the Price Risk Management for Agricultural Commodities conference.

"Whether you're putting in place a specialised risk management team, Unilever has opted to do that, or at a lower level putting in place more value at risk modelling," people are using more sophisticated risk management techniques for commodities, Shaw said.

During May commodity prices have see-sawed at the mercy of jittery investor sentiment, making it difficult for end users to manage price risk.

"Because we're having to manage these increasing risks as the markets get more volatile, you need to have more dedicated resource," Shaw said.

Most major food producers have had to increase their budgets for raw materials due to rising commodity prices and shareholders have proven sensitive to any adverse impact high commodity prices have on profits.

"It seems to me you can get away with saying something's happened to your results because of FX movements, and that's fine -- but if you say it's because of commodity movements the share price gets hammered," Shaw said.

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By Sarah McFarlane for Commodities Now