“Prices even out over the year”…do they?

"𝗣𝗿𝗶𝗰𝗲𝘀 𝘄𝗶𝗹𝗹 𝗲𝘃𝗲𝗻 𝗼𝘂𝘁 𝗼𝘃𝗲𝗿 𝘁𝗵𝗲 𝘆𝗲𝗮𝗿, 𝘁𝗵𝗲𝗿𝗲'𝘀 𝗻𝗼 𝗿𝗲𝗮𝘀𝗼𝗻 𝘁𝗼 𝗵𝗲𝗱𝗴𝗲."

I've lost track of how many times I've heard this in meetings.

As a trader I loved hearing it because it meant opportunity. Now I'm on the educational side I have a different reaction.

On the surface, it sounds reasonable. If you flip a fair coin a million times, you'll probably get close to 50/50 heads and tails.

But commodity prices aren't fair, and they're certainly not random in the way a coin toss is.

You could end up on the wrong side of prices 10 months out of 12. And even if you’re “right” half the time, your losses could easily outweigh your gains.

𝗖𝗼𝗺𝗽𝗮𝗻𝗶𝗲𝘀 𝘁𝗵𝗮𝘁 𝗱𝗼𝗻’𝘁 𝗵𝗲𝗱𝗴𝗲 𝗮𝗿𝗲 𝘀𝗽𝗲𝗰𝘂𝗹𝗮𝘁𝗶𝗻𝗴, 𝘄𝗵𝗲𝘁𝗵𝗲𝗿 𝘁𝗵𝗲𝘆 𝗿𝗲𝗮𝗹𝗶𝘇𝗲 𝗶𝘁 𝗼𝗿 𝗻𝗼𝘁.

Even firms that say they’re back-to-back rarely are. Unless you’re pricing both sides of the trade at the exact 𝘴𝘢𝘮𝘦 𝘵𝘪𝘮𝘦 and using the 𝘴𝘢𝘮𝘦 𝘳𝘦𝘧𝘦𝘳𝘦𝘯𝘤𝘦 𝘱𝘳𝘪𝘤𝘦, you have exposure.

And ironically, companies that choose to speculate openly may actually run less risk than those who believe prices will just "even out."

Why? Because speculators typically have strict controls:
Defined VaR limits
Stop-loss levels
Target risk/reward ratios

Companies that don’t hedge have 𝘯𝘰𝘯𝘦 of that. They’re just riding the wave, hoping it all works out over time.

Will it sometimes? Sure.
𝗕𝘂𝘁 𝗵𝗼𝗽𝗲 𝗶𝘀 𝗻𝗼𝘁 𝗮 𝗿𝗶𝘀𝗸 𝗺𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆.

Now, someone might say:
“𝗕𝘂𝘁 𝗦𝗮𝗺, 𝗮𝗿𝗲𝗻’𝘁 𝘆𝗼𝘂 𝘀𝗮𝘆𝗶𝗻𝗴 𝘁𝗵𝗶𝘀 𝗯𝗲𝗰𝗮𝘂𝘀𝗲 𝗶𝘁 𝗯𝗲𝗻𝗲𝗳𝗶𝘁𝘀 Perfectly Hedged LLC?"

Of course. That’s what any founder would do.
But in this case, implementing a hedging strategy would benefit those companies far more than it benefits me.