Rising Commodity Prices Hit Mid America (and Micky D’s): Leading or Lagging Indicator of the Future?

By now, you've probably read that McDonalds is planning on raising prices as a result of rising commodity prices. Even though the global fast food giant looks at price increases on a per-country basis -- and has raised prices in China and other markets, due to commodity price increases -- it appears that commodity inflation will directly impact its home market and Europe. According to The Globe and Mail, "the basket of goods that goes into McDonald's food preparation is expected to be 2 per cent to 2.5 per cent more expensive in the United States in 2011, the company said in an earnings release on Monday. In Europe, those same commodity prices will rise an estimated 3.5 per cent to 4.5 per cent." The publication also notes "ten crucial commodities account for 75 per cent of the company's grocery bills ... chicken, beef, pork, bread products, dairy, potatoes, paper, cola, fruit/vegetables, liquid condiments." Yet commodity price increases that McDonalds in full or in part ultimately passes along to consumers are only partially the result of direct price increases in traded food commodities.

McDonalds, as other restaurant, food and CPG companies are fully aware, considers the impact of direct and indirect commodity price rises as it looks to set prices. For example, increasing fuel surcharges for full truckload, LTL and ocean freight also factor into rising price equations (despite the fact that you can't hedge fuel under hedge accounting rules -- even if you're an airline -- like you can direct materials that go into a product, food or otherwise). Yet rising world agricultural prices certainly appear to be capturing the most attention in the past week (that and steel, which could see a 40% increase or more, depending on what economists and forecasters you believe).

Commodity management is a topic we'll be covering more of on Spend Matters in 2011 -- and is already covered extensively in the metals arena on MetalMiner -- yet I think the bigger question surrounding McDonald's statement is whether their planned actions are a lagging or leading indicator of general trends in the commodity market. Put me in the camp of betting on a rising commodity market in general -- albeit with significant volatility along the way -- owning to a slow to moderate economic recovery in the US, rising global demand in emerging markets, and investor speculation given the heights to which the regular stock market has climbed.

If your procurement organization does not have the skill sets to look at either direct or indirect hedging and related strategies to mitigate risk, and if you don't have an established trading function in the finance group, perhaps it's time to revisit your hiring plans for the year. After that, consider investigating the right set of technologies to automate the execution, management, accounting, forecasting, and supplier management tie-ins to broader commodity management approaches through often category-specific tools offered by providers like Brady Solutions, EKA Software, SolArc and Triple Point (incidentally, we have spoken with some of these providers and look forward to covering them this year). Demand aggregation providers like Supply Dynamics can also play a role as well in broader commodity management strategies.

- Jason Busch

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