You have been researching commodity markets and risk management for many years. What is it that fascinates you about futures markets?

What I find so interesting about futures markets is that they effectively form the core of price formation. Everything that is happening – harvests, geopolitics, supply and demand – comes together in that price. And that price changes continuously, because people interpret information differently over time. For companies, futures markets are particularly important because they help them gain control over prices. They allow you to look ahead, though not to predict: what will a product cost in three months, or in a year? That helps with purchasing, sales and planning.

Even if you do not actively trade in them, you are already using them. When you assess a price, you are – consciously or unconsciously – looking at what the market is indicating at that moment. That is why I always say: everyone uses futures markets, even if only as a reference point.

How would you explain a futures market in simple terms?

A futures market is essentially a place where you agree today on a price for delivery in the future. Suppose you know you will need oil in three months’ time. You can already agree now on the price at which you will buy it. This prevents you from being surprised by price increases later on. That sounds simple, but its use – hedging – is somewhat more complex. You never hedge risks perfectly, because prices do not always move one-to-one. Still, the principle is straightforward: you aim to gain greater certainty about your costs or revenues.

How and where did futures markets originate?

Futures trading has existed for much longer than people often realise. In the 17th century, contracts for future delivery were already used in the Netherlands and Japan. The modern futures market as we know it today emerged in Chicago in the 19th century. There, farmers and traders worked together to gain more certainty about prices. That function has essentially never changed. It is still about the same thing: managing risks and enabling better planning.

What happens if companies do not manage price risk?

If companies do not manage price risk, they are fully exposed to the market. In periods of strong price fluctuations, this translates directly into unpredictable costs and revenues. That uncertainty has clear consequences: companies face higher capital costs and have less room to invest. This is precisely why predictability is so important – it enables companies to look ahead and make better-informed decisions. In practice, companies therefore do not seek to avoid risk altogether, but to manage it actively.

Where does it often go wrong in practice when using futures markets?

The biggest mistake is that companies start without fully understanding what they are doing. Futures markets may seem simple, but using them requires knowledge. How much do you hedge? When do you enter the market? And how do you measure whether your strategy is working? In addition, there is often a lack of a clear approach within the company. Who is allowed to make decisions? Who monitors the risks? Without that structure, hedging can actually create more uncertainty rather than less.

How significant are the risks if things go wrong?

If things go wrong, they can escalate quickly. Due to leverage, small price movements can have large financial effects. In addition, fluctuations in results – for example due to margin requirements – can create a perception of instability. For financiers, this may give the impression that risks are not under control, resulting in higher capital costs and less room to invest. This is precisely why a clear and well-structured hedging strategy is essential.

Where do the greatest vulnerabilities currently lie for companies?

In increasing price volatility. Markets are moving faster and are more unpredictable than before. This makes it more difficult to maintain control over margins and profitability. Companies that do not respond to this risk their financial position becoming increasingly volatile.

Why is it particularly important to develop this knowledge now?

Because knowledge gives you options. You can choose to hedge actively, but even if you do not, it helps enormously to understand the market better. You gain a clearer sense of when to buy or when to wait, and you better understand how prices are formed. That automatically makes you a stronger player in the chain.

What can our readers do with this knowledge?

In a market that is becoming increasingly volatile, control over price risk is essential. With the right knowledge of futures and options markets, companies can stabilise their cash flows and strengthen their financial position.

Would you like to learn more about hedging and futures markets? The course by Joost Pennings, offered through Agri Food Academy, provides practical insights and directly applicable tools. For professionals looking to gain greater control over risks in commodity markets, this is a valuable investment. You can register via the link.