A type of risk, particularly financial risk, that affects an entity’s financial performance/ profitability as a result of fluctuations in the prices of commodities that are primarily driven by external market forces, and hence are not in its control.

In general, commodity risk reflects the possibility that changes in commodity prices (changes in the price of a certain commodity) will create financial losses for market participants, either on supply side (commodity buyers) or demand side (commodity producers). Changes in commodity prices affect an entity’s profitability and/ or market value.

A decrease in commodity prices causes a fall in revenue for commodity producers, which could impact both the short-term profitability and the market position of a producing company. In certain situations, long-term consequences may affect the level of production.

For commodity buyers, an increase in commodity prices has a negative effect, as reflected in drops in short-term profitability and a company’s market value.

Commodity risk is also known as a commodity price risk.