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- Oct. 6, 2010 -

Supply Chain News: Little Reported Amid Still Wobbly Economy, Commodity Price Shocks and Supply Concerns Surging Again

Agriculture, Metals Prices Soaring, Pressuring Bottom Lines; Longer Contracts, Direct Investment, Among the Weapons; Nestle Spending $500 Million to Help Coffee Growers Produce More


 
 

 

SCDigest Editorial Staff

SCDigest Says:
Food giant General Mills, for example, recently said it has locked in prices through hedging and derivative contracts for about 65% of its total commodity and energy spend for 2011.

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Before the great recession of 2008-09, commodity pricing and availability were  among the top supply chain and corporate concerns, pressuring bottom lines and causing companies to make changes in supply chain strategies, from hedging commodity prices to extremely long term contracts with commodity suppliers to even a return to verticalization.

Those concerns were largely eliminated as the recession began, with commodity prices across the board getting hammered to multi-year lows. But commodity prices in most categories are on the march again, along with concerns about future availability, even as most Western economies are struggling with weak recovery and some concerns about deflation.

Take agriculture: wheat futures are up some 70% since June, and corn is at a 2-year high. But that's nothing compared to coffee, which is at levels last seen more than a decade ago. The Standard & Poor's Precious Metals index is up 22.86% so far in 2010, regular metals up 6.09%. Metals companies of all sorts are seeing rapidly rising stock prices based on this bullish outlook for metals pricing.

Just this week, the International Monetary Fund (IMF) issued a report that said the boom in metal prices may only be halfway through its growth spurt, saying there are ''few convincing signs'' that key metal supplies are catching up with demand.

As a result, companies across the globe are again taking action to protect their profit margins and ensure supply continuity. The issue is doubly critical because most firms are unable to raise sell prices in the face the bargain-hunting consumer in the US.

Pain in being felt in many sectors and companies. For example, Starbucks CEO Howard Schultz recently said that rising commodity prices "have completely altered the economic and financial picture of many players in the coffee industry."

China continues to lead the way from both a corporate and government perspective, aggressively making investments in commodity suppliers, especially in Africa and South America. Case in point: BYD, a Chinese producer of cars and batteries, recently acquired an 18% stake in a lithium mine. ArcelorMittal, the world's largest steel producer, has been aggressively buying iron and coal mines in recent years, and this month announced it was investing an additional $4 billion to expand its iron ore production capacity to 100 million tons by 2010 - a very bullish bet on where pricing and demand are heading.

Nestle, the world's largest food company, is also getting hands on. In August, the company announced a major program to invest some $500 million in a variety of coffee-related projects, mostly with its growers in Latin America and Asia. That includes consulting with farmers on how to increase output and providing them 220 million high-yield, disease resistant starter plants. That follows a similar effort relative to cocoa launched in 2009.

 

(Sourcing and Procurement Article - Continued Below)

 
     
 
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Hedging commodity prices is growing again as a corporate tool to manage dynamic commodity costs. Food giant General Mills, for example, recently said it has locked in prices through hedging and derivative contracts for about 65% of its total commodity and energy spend for 2011.

BusinessWeek magazine quotes Greg Cudahy, global managing director of Accenture's operational strategy practice, as saying some companies are structuring new types of contracts with commodity suppliers to manage risk and pricing dynamics. For example, a buyer commits to a certain amount of commodity at a fixed price, with options for scaling back or increasing is buys once that threshold is reached based on the original contract price plus the pricing picture at the time. Part of the idea is to create more certainty in the relationship.

"You have to help partners lower their cost of doing business," Cudahy told BW.

Other companies are lengthening contracts, going as far as five years out from the traditional length of 12-24 months. The drivers are several, including locking in supply commitments in the face of rapidly growing demand from China, India and other developing economies. There are provisions for adjusting pricing during the contract period for changes in global market prices, but another key goal is to give the supplier a longer period of demand certainty, which they can use to plan production and investment decisions.

"Companies are absolutely more focused" on managing commodity exposure, according to Boston Consulting Group's Harold Sirkin.

Is your companies feeling the effects of rising commodity prices? What are the smart strategies for dealing with dynamic/rising commodity prices and potential supply constraints going forward? Let us know your thoughts at the Feedback button below.


 
     
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