Are you watching the commodity markets?

October 27th, 2009

If you are not

A customer asked me the other day what indexes we followed in our sourcing practices. Although this is a very broad question that could be answered any number of ways such as what product are you speaking about, it is in fact a very good question. Let me give you an example.

Let?s suppose you are planning your strategy to buy egg products such as whole eggs or liquid eggs or egg mixes. The first question you need to resolve is what makes up the largest cost in the egg farming process? To provide a short answer, it is feed. The follow up question to this should be what type of grain makes up the feed? Again a short answer is corn. Resultantly these two questions should lead to the conclusion that keeping track of grain market futures is probably the best bet for locking in your pricing strategy depending on the length of your contract. As an example, with this information you might insert escalator / deescalator language in your contract based on the market price of grain at the time you negotiated your pricing.

The next step is determining where you can find this type of information. At SafeSourcing we use the CME Group which includes the Chicago Board of Trade. For the egg market there is also another tool available that can also be useful which looks at the average weekly price of egg products by region of the country. Using the two together is normally your best bet to build a solid strategy.

The previously mentioned CME Group serves the risk management needs of customers around the globe. They provide the widest range of benchmark futures and options products available on any exchange, covering all major asset classes, including interest rates, equities, FX, commodities, and alternative investments such as weather and real estate.

If you are not watching the markets that drive the pricing of the products you buy, you may make some significant mistakes that could negatively impact your financial plan down the road.

We look forward to and appreciate your comments.

Ron Southard

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