While inflation has moderated from the highs seen in recent years, renewed volatility across commodity markets creates fresh challenge for UK SMEs.
One such business is Edinburgh Butter Company, for which cream is the most critical input cost and a primary driver of overall margin performance.
The price of cream is inherently volatile, influenced by a combination of seasonal milk production cycles, feed and energy costs at farm level and broader supply-demand dynamics across the European dairy market. Even relatively small shifts in cream pricing can have a disproportionate impact on profitability given the scale at which it is used in production, explains Managing Director, Nick Sinclair.
“Cream prices can move month to month, so the level of volatility is material enough to create uncertainty around future input costs,” he says. “This volatility makes forecasting, budgeting and longer-term planning more difficult, particularly when butter is being sold under annual fixed price contracts, because any gap between the contracted sales price and the future cost of cream can quickly affect margins.”
Prior to working with commodity hedging brokerage Attara, Edinburgh Butter Company had a physical procurement pattern in place, with cream purchased on a fortnightly basis. However, this approach was not sustainable as it created repeated exposure to market price swings and made forecasting and budgeting increasingly challenging.
The hedge has helped offset movements in physical procurement, with settlements made monthly. Crucially, it has been implemented in a way that does not disrupt existing supplier relationships or day-to-day operations.
“The main benefit has been greater price certainty over one of our largest input costs,” adds Sinclair. “Knowing what cream will cost in advance has allowed us to price future butter contracts with more confidence, improve forecasting accuracy and better protect margins and P&L from price volatility.”
Commodity markets are being shaped by a combination of geopolitics, macroeconomics and sector-specific supply dynamics notes Richard De Meo, CEO, Attara.
“In energy, the biggest driver remains uncertainty around the Middle East, particularly the situation around the Strait of Hormuz and whether regional tensions could disrupt supply again,” he says.
Even where prices have eased from recent highs, markets remain cautious because shipping flows are still recovering and the geopolitical backdrop remains fragile.
In metals, De Meo refers to the impact of a stronger US dollar, hawkish central bank commentary and a broader shift in risk sentiment, which has triggered sharp corrections across base metals. “At the same time, markets are still responding to supply side developments – particularly in copper, aluminium and nickel – where tariffs, inventory levels and output decisions in key producing regions continue to influence pricing.”
In agriculture, the focus is more on seasonal supply and inventory management, especially in dairy and grain markets. For producers, the immediate challenge is yield versus price with farmers facing low yields but with an uplift in price.
“Overall, what stands out is that commodity markets are being driven less by any single factor and more by the interaction between geopolitics, currency moves, monetary policy and supply discipline,” says De Meo. “For businesses exposed to these markets, a bigger challenge than predicting where prices will go next is managing the uncertainty that comes with that volatility. That is why more companies are looking to build flexibility into their procurement and hedging strategies, rather than leaving themselves fully exposed to spot market swings.”
