Commodity price rises will continue next year, say CPOs

16 November 2012

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16 November 2012 | Anna Reynolds

Some 80 per cent of chief procurement officers believe rising commodity prices will last for more than a year, and these increases will be passed onto consumers in 2013.

A poll of 21 CPOs and heads of commodity risk management at food and beverage companies carried out by consultancy AT Kearney found the past 10 years have seen a rise in volatility and inflation of agricultural commodities.

The primary reason behind the price increases has been drought in the US, which reached critical levels in July 2012 at a crucial time for crop development. From June to August the number of farms under greater drought conditions increased from 16 per cent of all farms to 43 per cent.

The survey revealed 43 per cent said price increases would affect company profitability. Further, 60 per cent of procurement leaders said they should buy more now to avoid higher prices later. The report warned small supplies at the end of 2011 and lower than expected yields means stock will be depleted going into 2013.

Although weather conditions contributed to much of the volatility last summer, the report identified other challenges for commodities including increased global demand, conflict and increased use of biofuels.

Some 70 per cent of CPOs said they would increase their use of hedging and financial contracts, with more than half planning to pass some costs on to consumers. But while most of CPOs agreed the risk must be managed very few used risk-sharing or collaborative approaches.

AT Kearney recommended four tools to manage a company’s risk. They advised to hedge positions in advance, share risk with retailers and use dynamic price strategies, form long-term agreements with suppliers to share the risk, or lock in prices and contract with farming groups to avoid large price swings.

Mark Clouse, an author of the report and a partner at AT Kearney, said: “While no one can predict the future of volatile commodity prices, everyone can prepare for it. Hedging alone is only a partial solution. What's really needed is some creativity - building strategies that hedge, deflect, transfer, and operate commodity risk. An integrated approach to commodity risk management separates those who react to volatility from those who manage it.”

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