Find it strange there isn't more discussion or outrage that Ford guessed wrong on materials hedge and put 350 million loss on the ledger. Interesting to see if GM guessed wrong as well. That's a poor guess on Fords part and pretty large chunk of somolians to potentially lose. Did they hire ex-Lehman Brothers hedge traders? Short from 13 XX
If I understood them correctly, this was already explained in other threads at this board. Ford's hedges were "marked to market". Since the market was down this quarter, that meant a loss. When the market goes back up, the paper loss now could easily turn into a paper gain later, depending on which commodities were covered.
Whichever stage a hedge is in, loss now or gain later, the loss or gain does not turn from existing "on paper only" into real cash or real assets until the hedges are sold/pay off and/or the stored stuff bought with futures is physically delivered.
ONE-TIME ISSUE. My personal opinion is, if Ford does not normally do these (their use this year was a reaction to criticism received in Q4 over not predicting commodity price changes), then these should be counted as one-time losses or gains, as they are not things to be counted on going forward.
MIDDLE-MEN ISSUE. My other opinion is companies should stay away from hedging (subject to manipulation due to illiquid markets) and just buy more inventory whenever the commodity price dips and store it. Steel, unlike corn, need not grow musty and less desirable the longer it is stored.
Ford could buy storage sites near wherever the steel is produced. That way, if it's not needed by Ford, Ford can sell it to somebody else later, as it's close to the transportation facilities for shipping to wherever.
Ford has to assume, when they do futures etc that a lot of what they pay is overhead and profit for somebody else. Ford could instead keep the profit portion for themselves if they were willing to take care of security and other overhead themselves, cut-out the storage and hedging middlemen sitting in London or wherever.
Maybe security would be too difficult an issue, too expensive, so that's why self-storage is not done?
FARMER ANALOGY. Farmers learned the self-storage lesson in the 70s. Many more started doing their own grain-drying and storage ahead of selling it, also started doing their own trucking to market.
Shaggy, yes the hedge can reverse. I can't comment on that because I don't know what will happen to prices in the future. That's what professional hedge traders are hired and paid very well to do. I stand on my statement that Fords in house team of hedge traders fouled up which in turn now is pressuring margins. It may reverse, but "may" is not something investors like to hang their hat on. Short from 13 XX
You start seeing this growing pattern of missteps by Ford. The impact may be slight on a per basis...but the cumulative effect starts to add up. Started with Q4 misstep Then insync issues Mis read of the 2 billion dealer judgement by not settling Mis read on material hedge Transmission issues popping up in Focus and Mutang.
A hedge isn't a guess, it is an insurance policy. The "loss" is simply a paper loss. There was no real drain on cash. It is all accounting. Your reaching hard to find something to criticize here. It's like faluting someone for maintaining health insurance, and then not getting sick -- claiming that they've waisted money.