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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All


From SCDigest's On-Target e-Magazine

March 1, 2011

Supply Chain News: A Picture Tells the Sad but True Tale, as Commodity Prices Continue Strong March


Huge Year over Year Prices Increases Virtually Across the Board; Widespread Warnings on Profits Across Sectors - and Maybe More Global Unrest Over Rising Food Prices


SCDigest Editorial Staff


Rising input prices from energy to agriculture are causing deep concern across business, political and economic circles, as commodity cost pressure are impacting corporate bottom lines, threaten to derail the nascent economic recovery, and are causing social turmoil in many parts of the globe.

Just this week, for example, the Chinese steel association said that the cost to produce steel was up almost 20% in 2010, due to rising prices for iron ore and other raw materials. Despite a growth in sales of 9.6%, selling prices were up just 15.7%, much less than production cost growth, leading to net profitability for the industry of just 2.91% in what is a pretty healthy demand market.

SCDigest Says:

The Department of Agriculture announced last week that the prices for corn, wheat and soybeans might surgeeven further in the second half of 2011, due mostly to anticipated supply bottlenecks.
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Floor materials manufacturing Armstrong Industries recently blamed a weak Q4 profit lumber on a $20 million increase in the cost of lumber.

In the consumer packaged goods, almost every company has been sounding the alarm at their Q4 earnings calls, warning of the impact of rising costs on 2011 profits and declaring their intent to raise prices - through their ability to push those price increases through to retail remains to be seen.

Two weeks ago, Kraft Foods lowered its 2011 earnings growth forecast in the face of what CEO Irene Rosenfeld called “significant input cost inflation and persistent consumer weakness in many markets." Kraft said it saw $489 million in additional input costs during its fourth quarter, and that it was expecting year-on-year inflation in its costs to be in the high single digits.

Prior to that, PepsiCo CFO Hugh Johnson forecast an input cost inflation range for 2011 of 8-9.5%, equivalent to an additional $1.4-1.6 billion in costs. "There aren’t many years in my 23 years at PepsiCo that I remember seeing that range,” Johnson said.

Similar outlooks have recently been offered by General Mills, Unilever, and many other consumer package goods companies.

Apparel companies are also getting hammered, with the costs of both cotton and fuel soaring. Many soft goods companies air freight goods produced in Asia to the US market to improve responsiveness, making them sensitive to jet fuel costs. Nike, Jones Apparel Group, and VF Corp. are among the major apparel manufactures that have warned of margin pressures due to input cost increases.

Of course, the impact of rising underlying commodity cost pressures ripple through many levels of the supply chain. Rising iron ore costs lead to rising prices from steel producers that then impact appliance and automotive manufacturers. Rising oil prices not only raise fuel costs but the cost for plastics and other materials that have a petroleum base.

(Sourcing and Procurement Article Continues Below)



With that said, below is a chart that shows year over year price changes as of yesterday for a number of key commodity items across energy, metals, and agricultural products.

Source: SCDigest

As can be seen, only natural gas, with a drop of 13%, has seen a year over year decrease in costs. Every other commodity has seen at least double digit price increases, with palladium, cotton, coffee and silver all seeing price gains of over 100% in just 12 months.

Corn, wheat and soybeans are all up more than 50% in the past year.

While most of these increases come off very low levels that we were reach in 2009 and we slow to recover into early 2010, budgets and selling prices had also adjusted to that "new normal," meaning the cost increases still raise havoc on profit margins.
But there are many other impacts of rising commodity prices beyond corporate profitability.

Rising food prices were thought to be a key factor in the recent protests and in North Africa and the Middle East. Since high food prices impact the poor disproportionately, protests are spreading to a wider variety of nations.

While historically such commodity price surges have almost always led to a reversal, as companies and individuals take steps to reduce demand and providers increase output to take advantage of higher prices, ultimately leading to excess supply, the change in the tide may not happen quickly.

For example, the Department of Agriculture announced last week that the prices for corn, wheat and soybeans might surgeeven further in the second half of 2011, due mostly to anticipated supply bottlenecks. Despite higher plantings for corn and soybeans this spring, the supply is expected to remain tight due to strong export demand and rising biofuel demand.

Do you expect commodity prices to continue to head Northward? Will companies be able to raise prices anywhere fast enough to maintain profitability? Let us know your thoughts at the Feedback button below.

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