The Commodity Bulls are Back in Town — A Return to Commodity Price Inflation?

Even though the world economy could very well be hitting at least a current bottom -- I personally still believe there's significant room to fall based on both the lack of available credit and overall US and consumer debt levels -- it's unlikely that the commodity markets will take as long to recover to previous levels as general economic activity. In fact, there's a better than even chance that many commodity markets will come roaring back due to a combination of investor speculation (and a flight to the perceived safety of oil, energy and metals) and increased order volume due to companies working off inventories and new consumer demand signals. But what commodity markets will come back first? An article from last week in The Wall Street Journal suggests that sugar as one commodty that is already partying like its 1999 again.

According to the article, "World raw sugar futures shot to new highs Monday, bolstered by speculative fund buying and a bullish supply-and-demand picture, analysts said ... Sugar's gains are underpinned by a 3% advance in crude oil futures and early strength in the major commodity indexes, with a weak dollar also supportive for the commodity sector." It's likely that in the coming months, other commodities will march behind -- if not in lock-step -- with the recent boosts in sugar and oil prices. But what can companies do to prepare for rising prices in commodity markets?

My first piece of advice is don't be an idiot when it comes to claiming savings from falling market prices. Trust me, there are a lot of idiots out there -- I've spoken to a good many of them -- who have literally claimed to management with a straight face that they've achieved "cost savings" as commodity markets have come down. But how have they done it? Simply surfing the market on the same waves as everyone else. Gentlemen and ladies, this is cost savings/cost avoidance suicide if you think such strategies can last. It's essential to develop a commodity market strategy that takes into account fluctuating commodity markets and takes a close examination at the ownership and assumption of commodity risk throughout the supply chain (starting with your customers and working backward).

Stay tuned for further tips on dealing with rising commodity markets in the coming weeks and months on Spend Matters. Fortunately -- at least for me -- we'll be able to dust off and recycle (how green of us) a lot of material we wrote about in the previous commodity markets bull cycle.

Jason Busch

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