The financial risk that impacts an entity’s financial performance/ profitability due to fluctuations (volatility) in the prices of commodities in a market. Price fluctuations are driven by external forces- i.e., supply and demand factors and other fundamentals over which the entity has no control. Fluctuations in market price affect an entity’s costs (production costs), product pricing, revenue and ability to secure funding, etc. Broadly speaking, the entity’s financial performance and profitability will suffer due to the impact of such fluctuations on the value chain of the entity.

For example, rising commodity prices can reduce profitability for the entity consuming such commodities (especially where it would not be possible, on the short run at least, to pass on cost increases to consumers, partially or in full). Under this scenario, the ability of the entity to carry on in its industry may be impaired, and it terms of market capitalization it may lose part of its value. Furthermore, rising commodity prices may entire more competition: producers may attempt to increase supply to benefit from price increases, and new entrants may emerge seeking to take advantage of price increases.