We must reconsider hedging

Hedging is a strategy employed in the futures, options and warrants markets to reduce risk by making a transaction in one market to protect against a loss in another.

Traditionally, a commodity producer (say, a cocoa grower) would agree to sell goods at a stated price at a stated time in the future, and the user of the commodity (say, a chocolate manufacturer) would agree to buy them. 

By agreeing on a price, quantity and delivery date, they introduce certainty into their operations and reduce risk. For the producer, the risk would be that prices drop, and for the processor that they would rise. 

A number of companies and even countries have been smart about it, by adopting a hedging policy just to manage their foreign exchange losses and other financial risks. 

Crude Oil producers can hedge against falling crude oil price by taking up a position in the crude oil futures market. 

One such company is Kosmos Energy Ghana which is not bothered by the recent fall in the price of crude oil prices and volatilities of the cedi, because it has hedged up to 75 per cent of its output.

“We have looked at the oil price sector with regard to hedging our production, such that we have protection against the low side and that is very much how we budget. This year, the company has hedged up to 75 per cent of its production,” the Vice President and Country Manager of Kosmos Energy, Mr Ken Keag, told the GRAPHIC BUSINESS in Accra on April17.

The company’s hedging policy, therefore, means that up to three-fourth of its crude oil exports will not be affected by the slump in oil price, which dropped to as low as US$43 a barrel in February this year from about US$110 a barrel in June, last year.

While we laud Kosmos for being smart about managing its exposure, we ask the government to revisit its hedging programme which was implemented in 2010-2012 with respect to its imports of crude oil.

The 2010-2012 hedging of 50 per cent of the country’s crude oil requirements was touted by all as very successful. It contributed to one of the longest periods of monetary and fiscal stability in the history of Ghana.

As a nation, we find ourselves in a very tight position because our finances are in bad shape. We need to turn the corner and in doing so we must apply all the tools available to us. 

While the low prices may benefit the country because it is a heavy crude oil consumer, at the same time it would affect its revenues, since it has also become an exporter of the product. This is evident in the recent announcement by the Finance Minister that it was recasting its revenue projections from oil exports by about 65 per cent.

This sharply contrasts with what private sector actors such as Kosmos will do in such periods of volatilities. Indeed, while the government is dropping its expectations, the company is unfazed because of a spot-on risk management policy.

The GRAPHIC BUSINESS wishes to urge the government to critically look at the hedging policy again, draw from expertise in and out of the country to feed into a price risk management tool to safeguard the economy.

These fluctuations affect the very lives and economic wellbeing of the people and should be taken seriously and bold steps taken to get hardship mitigating policies in place. — GB