Risk refers to the uncertainty associated with an outcome. The uncertainty associated with commodity prices affects the ability of both producers and consumers to manage their business effectively.

Risk can be quantified in different ways. A traditional measure is volatility. Volatility refers to the annualized standard deviation of historical returns expressed in percentage terms. Standard deviation is simply the spread of returns around an average. The wider the spread of returns, the higher the standard deviation.

The increasing volatility of commodity prices leaves producers and consumers vulnerable to adverse price shocks with negative implications for operating margins and profits. Managing this volatility in a transparent, disciplined, and cost effective manner is critical.