Smart hedging strategies help trade-dependent businesses maximize their profits during uncertain times.
Originally published on April 3, 2025. Last updated on June 18, 2025, to reflect the latest U.S. tariff developments.
For manufacturers and construction firms, the global trade landscape in 2025 is fraught with uncertainty. Recent tariff hikes – including a baseline 10% tariff on all imports, 25% levies on imports from Canada and Mexico, and up to approximately 55% % on Chinese imports (30% blanket tariff plus up to 25% in Section 301 duties), along with additional duties now at 50% on steel, aluminum and approximately 14.5% on Canadian lumber – have sent shockwaves through supply chains, driving up material costs and squeezing profit margins. In this volatile environment, businesses must adopt proactive strategies to stabilize costs and maintain competitiveness. One such strategy, commodity swaps, offers a powerful hedge against price fluctuations, enabling companies to lock in predictable expenses and safeguard their bottom lines.
Tariffs and Their Impact on Key Industries
Tariffs on imported goods have caused a ripple effect across multiple sectors, with manufacturers and construction firms feeling the brunt of rising material costs. With raw material expenses accounting for a significant portion of production budgets, even small price fluctuations can erode profit margins. Companies that rely on international supply chains face additional challenges, including longer lead times and higher transportation costs.
“The biggest concern from clients is uncertainty,” notes Steve Eikenberry of First American Bank. “The use of tariffs as a negotiation tool and the prospect of retaliatory action means that they don’t know if tariffs will rise further or disappear in six months. This makes it difficult to project costs, manage inventory, or price products confidently.”
For many companies, absorbing these higher costs is simply not an option. While some may attempt to pass the increase onto customers, competitive pressures often limit pricing flexibility. Others may explore alternative sourcing strategies, but shifting suppliers is rarely a quick or seamless process. This is where financial instruments like commodity swaps can provide relief.
Commodity Swaps Are a Hedge Against Volatility
Commodity swaps are financial contracts that allow businesses to lock in prices for essential raw materials over a specified period. By entering into a swap agreement, a company can hedge against price fluctuations, ensuring greater predictability in its cost structure. Here’s how they work:
- A business agrees to exchange a floating commodity price (which fluctuates with the market) for a fixed price with a financial institution.
- If market prices rise above the agreed-upon rate, the business purchases the commodity at the higher market rate but receives a payment back under the swap that reduces their net cost to the lower fixed price.
- If prices fall, the company purchases the commodity at the lower market price, and also makes a payment under the swap so that its net cost is the fixed price.
“Commodity swaps aren’t about betting on markets; they’re about locking in your cost of production,” explains Eikenberry. “They let businesses plan with confidence, even in chaotic trade environments.”
The Role of Banks in Implementing Commodity Swaps
Navigating the complexities of commodity swaps requires expertise, and financial institutions such as First American Bank are essential in structuring these agreements to align with business needs. Banks help companies assess their exposure to price volatility, structure swap agreements that match operational goals, and provide ongoing market analysis to ensure businesses remain well-positioned.
For firms unfamiliar with commodity swaps, working with an experienced banking partner ensures they fully understand both the benefits and risks before committing to a strategy. However, these financial instruments aren’t without hurdles. Regulatory requirements, such as Dodd-Frank compliance, limit participation to sophisticated entities meeting asset thresholds. Additionally, volume requirements mean that while large-scale transactions – such as securing hundreds of thousands of pounds of aluminum – can yield significant savings, smaller purchases may not justify the costs. Counterparty risk is another factor, making it crucial to work with reputable financial institutions.
Stability in an Unstable Market
Tariffs are reshaping the economic landscape, but they don’t have to derail growth. By leveraging tools like commodity swaps paired with strategic sourcing and financial planning, businesses can transform uncertainty into opportunity. As Eikenberry advises, “The goal isn’t to predict the market’s direction. It’s to remove variables so you can focus on running your business effectively.”
For manufacturers and construction firms, the path forward lies in proactive risk management. With the right partnerships and financial instruments, companies can navigate 2025’s trade challenges and emerge stronger.
Steve Eikenberry is a Senior Vice President at First American Bank, specializing in financial solutions for manufacturers and trade-dependent businesses.
