Thanks to a booming market for that incredibly inefficient substance, ethanol -- I say inefficient mockingly because for the amount of miles you could cover in your SUV on a single gallon of the stuff, you could also keep a small mercenary (or not so mercenary, in the case of the Ruskies) army looped for months -- we're seeing what is being termed 'agflation' across a range of other food commodities. Personally, I think the rise of ethanol is just another case of the special interest groups in Washington porking it – versus drinking it -- up. But regardless of my opinion, we should all pay attention to the market implications of the ethanol boom.
According to a short article in Supply Chain Digest, "Corporate buyers have battled rising prices for raw material commodities such as metals and energy over the past few years, but now for many, a new enemy is at hand: 'Agflation,' a term coined it appears by analysts from Merrill Lynch earlier this year. Wheat and other grain prices are at 10-year highs. Prices for corn and derivative products like corn syrup have risen dramatically, 'fueled' in part by strong demand for corn for use in ethanol production."
For companies and retailers across industries, the rise in prices for such key areas as corn, milk, wheat and grain -- not to mention derivative and chemical substances from the same commodity groups -- will have significant implications not the least of which are rising near term prices. But just as Southwest Airlines so famously hedged jet fuel prices before the market continued its steep climb upwards, progressive organizations have the chance to create similar hedged or laddering strategies for many -- but not all -- key food commodity inputs using exchange traded instruments (or custom financial instruments in some cases).
Earlier this year, I wrote in CPO Agenda about how procurement organizations can prove their worth in such situations through introducing new financially driven risk management approaches that extend into their supply chain. Clearly, if you're in a business impacted by agflation, it's high-time to rethink procurement’s involvement in trading and risk areas.