Do you pay attention to the commodity markets?

April 28th, 2010

If you don’t, you could be making some big mistakes in your sourcing strategies.

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 inforamtion you might insert escalator / deescalator language in your contract based on the market price of grain at the time you negotiated your pricing.

The same story is true for all products based on the raw materials that make up the majority of the particular finished good. It may be a paper pulp based product, a plastics based product a steel based product a petroleum based product or many other raw goods. All of these commodities can be monitored.

Now you need to determine where to find this type of information. At SafeSourcing, one source we use is the CME Group which includes the Chicago Board of Trade. For our egg market example 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.

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