Rising raw material costs can quickly pressure margins, disrupt forecasts, and reduce pricing flexibility. Generally, companies attempt to offset these cost increases by raising prices to consumers. However, prices may not always be increased to the extent raw material costs increase due to consumer price sensitivity or pricing pressures from competitors. Additionally, passing price increases to consumers could potentially result in lower demand for products and sales volumes. For manufacturers and other input-sensitive businesses, derivatives can be an effective tool to manage that exposure. These instruments are used to reduce the financial impact of commodity price increases and create greater predictability in procurement costs. In practice, the objective is less about beating the market and more about protecting earnings, improving planning, and reducing volatility in operating results.
The most common hedging tools are futures, forwards, options, and swaps. Each offers a different balance between cost certainty and flexibility. Some strategies lock in pricing for future purchases, while others provide protection against price spikes but still allow a company to benefit if markets move favorably. The right structure depends on the company’s purchasing profile, risk tolerance, liquidity, and governance capabilities.
Pros/Benefits
The primary advantage of hedging is greater stability. By reducing exposure to sudden commodity price increases, derivatives can help protect gross margins, support more reliable forecasting, and improve visibility into future costs. That stability can strengthen pricing decisions, inventory planning, and capital allocation. A disciplined hedging program may also increase confidence among lenders, investors, and the board by demonstrating that management is proactively managing a material business risk.
Cons/Risks
The trade-off is that derivatives add cost, complexity, and execution risk. Depending on the instrument, a company may incur premiums, margin requirements, transaction fees, and administrative overhead. There is also the risk that the hedge may not track the underlying raw material perfectly or that positions may be poorly sized relative to actual demand. Without clear policies, oversight, and reporting, a hedging program can create unintended earnings volatility or drift into speculative activity. For that reason, governance is as important as market view.
Costs Versus Strategic Value
Whether hedging is worthwhile depends on the size of the exposure and the business impact of price volatility. The direct costs of derivatives are visible and measurable; the benefits are often seen in what the company avoids, such as margin erosion, pricing disruption, covenant pressure, or cash flow stress. In that sense, hedging should be evaluated as a strategic risk management decision rather than a standalone profit opportunity. For businesses with meaningful commodity exposure, paying for greater predictability may be well justified.
Real-World Example
Let’s consider Tyson Foods as an example. As a large food manufacturer, Tyson Foods is materially exposed to commodity inputs such as feed ingredients, and its public reporting shows how those costs can affect profitability. In fiscal 2023, Tyson reported approximately $300 million of higher feed ingredient costs in its chicken division and net derivative losses of about $80 million, compared with net derivative gains of about $195 million in the prior year1. These results are useful because they show how derivatives can influence margin stabilization. When input costs rise, hedging can help cushion gross margin pressure by offsetting part of the increase and making input costs more predictable. That does not eliminate raw material inflation. However, it can reduce the severity and volatility of the margin impact, which supports pricing, planning, and earnings visibility. Tyson’s results also show the trade-off: derivatives do not guarantee a favorable outcome in every period, and hedge results may themselves be a source of earnings variability. Even so, for manufacturers with meaningful commodity exposure, the strategic value of hedging is often its ability to moderate margin swings and improve decision-making in volatile markets.
Final Thoughts
In summary, derivatives can be a practical way to reduce exposure to rising raw material costs, particularly when commodity volatility has a meaningful effect on margins and earnings visibility. The strongest programs are selective, policy-driven, and closely aligned with forecasted purchasing needs. For leadership teams, the central question is not whether derivatives eliminate cost pressure, but whether they provide enough stability to support pricing, planning, and broader business performance. When used with discipline, they can.
To learn more about how derivatives can help consumer and industrial product companies manage raw material inflation, please connect with us.
Disclaimer:
This article was prepared by a CBIZ affiliate other than CBIZ Investment Advisory Services (CBIZ IAS) and does not necessarily reflect the views, guidance, or services of CBIZ IAS. This content is for informational purposes only and should not be considered investment advice or a recommendation from CBIZ IAS. Any investment decisions should be made only after consulting with a qualified investment advisor or financial professional.
Frequently Asked Questions
Raw material hedging uses financial derivatives to reduce exposure to commodity price volatility and improve predictability in input costs.
The most common instruments are futures, forwards, options, and swaps—each offering a different balance of cost certainty and flexibility.
Hedging can help stabilize margins, support more reliable forecasting, and reduce earnings volatility tied to commodity price swings.
Derivatives add cost and complexity and require strong governance. Poorly designed or managed hedges can increase volatility or create execution risk.
Hedging should be viewed as a strategic risk management decision, weighing the cost of derivatives against the business impact of raw material price volatility.
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