Procurement and Commodity Prices Meet Wall Street -- What’s an ETF and Why Should I Care?

Last month, my wife, Lisa Reisman, asked me a simple question at the dinner table: can you explain what ETFs are and how they work in non-finance speak? I tried. And I failed (the former amateur options trader in me is not terribly good at these sorts of things). That set Lisa and her partner on a mission to not only better understand ETFs from a non-finance perspective, but to investigate how companies should -- and should not -- apply them as potential commodity risk mitigation and management tools from a hedging perspective. In their research, they also found a clear indication that at least in the metals markets, much of the current volatility in underlying commodities -- and the general if not steady run-up in prices in recent years -- has coincided with the introduction of ETFs to the broader marketplace. Granted, there have been other factors causing the run-up in commodities pricing (e.g., China, other forms of investments including physicals, forwards, calls, puts, etc.), but the timing of the rise of ETFs in the broader market with price appreciation appears to be more than a coincidence.

If you're interested in learning more about the subject -- and any procurement or supply chain organization with any significant base metals spend either directly or indirectly through their suppliers should be -- I'd strongly encourage you to scan the articles at your convenience. They're a great primer on the entire subject of ETFs and their relation to commodity prices and the sourcing world. I know they'll form a small part of the update on Nonferrous metals that Lisa is giving at Purchasing's Smart Sourcing Summit next week in Chicago (Rosemont, to be exact).

Unfortunately, I'm going to be a bad husband and RSS partner by missing her speak (I'll be with clients elsewhere in the country). But if you've seen me hurl forth from the stage, Lisa is more quantitative and polished in comparison than yours truly (she's also quite the subject matter expert in her area). I'm more the professor, she's more the analyst. A Michigan reporter wrote up a previous presentation she gave on the subject in September which has some forecast data in it as well. In the meantime -- and if you can't make the presentation in Chicago -- here are the pieces if you're curious to learn more about ETFs and their relation to commodity prices and procurement strategies:

Can ETF Commodity Backed Funds be Used for Hedging?

The Role of ETFs or ETNs on Base Metal Prices

A Primer on Base Metal ETFs

- Jason Busch