Commodities Are Sizzling: A Dangerous Concoction/Tips For Staying Out of the Procurement Frying Pan

Last time commodity markets boomed in 2008, many procurement organizations were woefully underprepared to manage through the volatility, except in cases where it was considered the industry norm to immediately pass through price increases to customers. In the time since then, as we've continued to observe the market and interview leaders within it, it's become clear that select organizations are better prepared than before. But the majority of procurement organizations still have limited organizational skills and knowledge when it comes to the options they have on the table. In short, the market has become bifurcated, splitting between a minority of organizations that are better prepared than before to manage volatility and those which are nearly as clueless as the last time around.

It behooves those in the latter camp to get their commodity volatility management act in gear as quickly as possible. I came across this headline from Procurement Leaders yesterday that highlights the latest movements in the past week, from "rising food prices ... on the back of global food shortages" to escalating metals prices, an area we track very closely over on our sister site, MetalMiner. In our view, a current cocktail of uncertainty could very well be the perfect storm for commodity market escalation in Q42010 and the first half of 2011.

This rather dangerous mixed concoction is made from a unique ingredient list at the moment. It's composed of various parts seasonal supply shortages (e.g., poor staple/food harvests in the spring/summer), traditional speculation (e.g., precious/semi-precious metals), new forms of speculation (e.g., ETFs), global/Chinese demand, overall demand and order uncertainty, trade concerns and capacity limitations in certain supply markets. As complicated as the situation sounds, there's hope -- even if you don't think that you're adequately prepared. Stay tuned. We're going to lay out a simplified list of a few options you have available to you in Part 2 of this post.

Jason Busch

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