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Brands under pressure from rising commodity prices

February 27, 2007

Companies are facing increased pressure on prices driven by rising commodity costs.

There appear to be three forces driving these increases; dwindling supplies, global warming and China’s voracious appetite.

Andrew Zolli’s, piece in Fast Company on Business 3.0 contains some alarming statistics relating to the depletion of core commodities.

“Resource scarcity is going to be a front-page business issue as well, affecting industries from transportation to electronics. According to estimates by the International Institute for Environment and Development, at today’s levels of production, there may be only another 28 years’ worth of copper in the ground, another 21 years’ worth of lead, a 17-year supply of silver, and 37 years’ worth of tin. We will certainly get better at extracting, recycling, efficiently using, and finding replacements for these materials, but it’s likely that basic industrial inputs will come under increasing pressure in the decades to come. A shortage of industrial-grade silicon, for instance, has recently spooked both the solar-cell industry and Silicon Valley. Moore’s Law never assumed we’d run out of sand.”

Not only are these in short supply, but there’s been pricing pressure on other basic commodities.

In a meeting with analysts last week, SAB Miller Brewing identified rising prices of aluminum and glass as an issue.

Price of Commodities Impacting SAB Miller

The FT reports on another brewer, Holland’s Heineken having problems because of the price of barley, a key ingredient of beer. Since May last year, prices have risen 85% because supplies are short as farmers switch to the more lucrative biofuels.

The Economist also covers the topic

“In 2001-02 only 706m bushels of corn were used for fuel in America. In the 2006-7 season that figure looks likely to treble, to 2.15 billion bushels. And, as demand shoots up, global corn inventories are at their lowest level in almost 30 years.

What about other agricultural products? Global warming may be having a further impact here by virtue of the drought in Australia (part of a long-term trend, rather than a one-off disaster), which has forced up wheat prices. High corn prices are also encouraging farmers to rotate their crops away from soybeans, and are likely to force prices for that crop higher. All of the above (corn, soybeans and wheat) are key parts of the feed chain for cattle and pig farmers. And thus, inevitably, they will drive up livestock prices. There is a lag involved. Merrill estimates that, if grain prices rise by 30%, livestock prices will jump 10% after a period of three to six months.”

Companies will have little choice, but to pass these increases onto the consumer in the form of higher prices, leaving economists to worry about the potential impact on inflation.

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