This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Commodity Hedging Could Help Provinces Manage Sudden Swings From Surplus To Deficit: CIBC

Provincial performance gap narrows as volatile resource markets dampen outlook for some regions, while budding U.S. recovery lifts others

TORONTO, Jan. 29, 2013 /CNW/ - Canada's resource-rich provinces whose fortunes have been dampened by commodity price swings should consider hedging against those risks, even if it means giving up part of the revenue windfall when prices are high, notes a new report from CIBC World Markets Inc.

Canada's "resource bounty has in the past decade been a big winner for government coffers.  But resources are called cyclicals for a reason, and provincial finance ministers are now acutely aware that a bountiful surplus can turn into a gaping deficit in a hurry when commodity prices slip," says Chief Economist Avery Shenfeld at CIBC in the latest Economic Insights report. "The result is that fiscal outcomes in any one year are highly uncertain, leaving finance ministers struggling to explain why they held spending lean when revenues were gushing in, or why a deficit suddenly emerged and forced borrowing up in the process."

In the corporate world, strategies for protecting revenues against adverse swings in commodity prices are routinely used and could be similarly applied by governments, says Mr. Shenfeld.   "To smooth out the bumps and allow time to adjust" to new commodity prices, resource producers and buyers "typically use derivative markets to hedge against some of the price risks in the near term, giving up some of the upside in exchange for protection against large adverse swings.

"There's no reason why provinces couldn't do the same, locking in a range for current year fiscal results, and giving time to make adjustments in revenue or expenditure policies in the following year's fiscal plan should the resource price trend persist. That would clearly be preferable to surprising the bond market with in-year borrowing changes, or rushing to make mid-year spending swings that might not be optimal on other public policy grounds."

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,912.11 -70.48 -0.42%
S&P 500 1,969.95 -8.96 -0.45%
NASDAQ 4,442.6980 -2.2110 -0.05%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs