Some commodity users are finding input inflation rising sharply.
While the concerns regarding end-user exemptions and margining are still foremost in many corporate treasurers’ minds, another concern is butting its way into treasury consciousness: commodity inflation.
According to a report from Fitch Ratings Agency, input inflation across a broad range of agricultural, energy, and industrial commodities has risen sharply and is expected to put increasing pressure on margins and prices in some commodities in 2011. What is worse, some users find themselves pinched as core inflation in the US and other developed economies remain largely in check, which limits their ability to pass on costs.
These sharp increases may be why some members of The NeuGroup’s Treasurers’ Group of Thirty (T30) – notably end-user groups like airlines – have been more willing than others to see contracts migrate to exchanges. The hope here is that moving to an exchange would help curb speculation, which has rocked commodity contracts over the past several years. According to the Fitch study, jet fuel is responsible for 25-35 percent of airline operating costs, and carriers find themselves constrained by limited pricing power. Further, Fitch said, increases in crude oil to above $110 per barrel – and judging by the reactions to the Libya chaos this is possible – “would likely trigger more commodity-capacity reductions.”
And input inflation is expected to continue, Fitch said, with numerous factors driving the increases including the Fed’s low interest-rate policy, and “white-hot growth rates in major emerging markets such as China and Brazil,” which is increasing demand for commodities.
According to Fitch, sectors with the least amount of leeway to work with in terms of hedging include protein processors (input exposure: corn, soybeans and other grains), ethanol producers (corn, crude oil, natural gas exposure), airlines (jet fuel and crude oil exposure), and department store retailers (cotton, wool exposure), while those least affected include beverage producers and automotive suppliers.
On the bright side, if one exists for those commodity end-users affected by the spike, is that a focus on commodity risks has prompted attention to others. One T30 member noted that his company had used the jump in prices to create more awareness of risk across the company.