Commodity Risk Management Expertise Centre
CORMEC is a joint initiative of Wageningen University (Marketing and Consumer Behaviour Group), Maastricht University (Departments of Finance and Marketing & Supply Chain Management), and the University of Illinois at Urbana-Champaign (Office for futures & Options Research, Marketing & Decision Sciences Group) on topics of management of market risk in the agribusiness sector.
Increasing commodity price volatility leads to higher volatility of profit margin of firms, thereby a higher cost of capital. A higher cost of capital decreases the value of the firm and inhibits its capacity to innovate. As a result, commodity risk management has become a prominent strategy along with innovation and market orientation, as it reduces the risk-adjusted cost of capital and hence contributes to shareholder value. Firms face the challenge to identify the effectiveness of risk management strategies and instruments, how to implement such a strategy and effectively execute such a strategy (for example taking optimal hedging positions in commodity futures and options markets or having an effective product development/marketing strategy)
CORMEC will develop into an eco-system with both a highly innovative character in (price) risk management research and a prime environment in which these instruments and strategies can be developed, applied and allowed to flourish. Crucial to this eco-system is a synergy with large corporations, innovative SMEs, government and international knowledge institutes in the field of price risk management enabled by the development of risk management instruments and strategies.
CORMEC revolves around three main pillars:
(1) Academics, fundamental and applied research on commodity risk management in relation to innovation and value creation. Applied research will be undertaken on a case-by-case contract-basis with industry partners.
(2) Professional Education, professional training for industry executives. Wageningen University, Maastricht University together with the University of Illinois at Urbana-Champaign will develop a risk management training program that will enable market participants from primary, processing and retail in the commodity sector to optimize their risk management and hence enhance firm and shareholder value.
(3) Extension, relating fundamental and applied research to real-life contexts with cooperation with industry. Here, CORMEC works with new risk management strategies, such as financial risk management, market orientation and innovation as alternative strategies for creating firm value through advice, tools and other activities. Firms already rallied around the initiative of establishing product groups aimed at managing risk through the development and application of new instruments and strategies. This setup will also involve participants from the financial industry such as exchanges and brokers by setting up a “trading room” (supported by CORMEC) in which firms can actually execute these new risk management strategies. Integral to this approach is a close cooperation with all market participants to develop and apply new risk management instruments, tailor-made to the operational needs and requirements of the participating industry partners, creating value to all parties involved.
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