The Commodity Train Accelerates — Food Price Increases Continue

It's not just certain base metals (e.g., tin) and cotton that have been in for a roller-coaster ride of late. We can now add a range of agricultural and staple crops to the commodity roller coaster. The above-linked NYT article notes that volatility is becoming the norm. Take corn, which saw a drop in the first part of October, but then a soaring rebound in the most recent weeks. The Times opines that "the rise in prices is a good indication of how volatile the market has become for commodity futures in basic farm products like corn or wheat." A combination of factors are driving tight demand and volatile (and rising) prices, ranging from alternative uses for certain crops (e.g., ethanol for corn) to less-than-stellar regional harvests in certain parts of the world to an increase in market speculation.

As an example, consider that "the average price for the new crop [corn], which will encompass sales through next August, is expected to be a record, at about $5 a bushel, well above the $3.95 average price for the last three crops." As is the case with base metals, China is also factoring into the equation, but in certain commodities such as corn, often for the first time. To this end, "China surprised experts when it made some purchases earlier this year, but it is not clear if it will be a major buyer of the current crop."

As I noted on Spend Matters recently in another related post, it's clear that commodity prices are starting to sizzle. Yet there are clear tips to follow when it comes to staying out of the frying pan if you're willing to do some pre-emptive cooking. Whether it's corn, cotton, wheat, rice, base metals, energy, oil or other commodities, by investing in the internal skill-sets and technology (hint, your current sourcing platforms won't do the trick, nor will those with a traditional sourcing/buying skill set with no past exposure to finance be able to step in without additional training) it's possible to become more proactive around managing commodity volatility and risk.

When you here statements like this one from the USDA's Chief Economist, Joseph Glauber, that "it just appears to be a very, very tight situation, and so there will be a lot of volatility," it's time to get moving fast. That is, unless your shareholders and customers are willing to assume commodity risk for you.

Jason Busch

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