Massive rise in commodities buyers seeking help

There has been “unprecedented interest” from food manufacturers and retailers in tools to help them take a more strategic approach to raw materials purchasing in recent weeks, according to insurers, data providers and financial services firms.

Mintec, which provides information and tools for buyers and sellers of commodities, has seen a recent surge in demand for its services from the food industry, said business development manager Nick Peksa.

“We’ve picked up business with four major European supermarket chains and several leading food manufacturers in the last few weeks," said Peksa. "I think they have always kept a reasonable tab on things like cocoa and coffee; but when it comes to fruits and vegetables, meat or even some packaging materials, they haven’t got a clue where prices might be in six months’ time. You’d be shocked by how reactive many companies’ purchasing policies are.”

The recent volatility in the price of many key commodities had caused major problems for many companies because they had not made a proper assessment of their exposure, he said.

“Many food and drink firms have realised that they weren’t being strategic enough in their approach to purchasing,” he said. They also weren’t thinking about what factors were driving the price and which were long and short-term drivers, he added.

Meanwhile, food manufacturers should probably be prepared for higher commodity prices and continued volatility, despite the recent fall in prices, added financial services provider Rabobank.

The price of corn, wheat and other raw materials had dropped significantly in recent months following the unprecedented rises of 2007-2008, acknowledged Rabobank associate director, processed food and retail Sebastiaan Schreijen. This had been driven by a combination of financial investors exiting the market and liquidating their positions, falling demand owing to the weakening economy, capacity extensions and better than expected crops, he said.

However, underlying demographic changes and smaller buffer stocks meant prices would reach “a new equilibrium substantially above historical lows and remain highly volatile”, he predicted. “The current price declines in most agricultural commodities are overshooting. These drops may provide some relief in the months to come, but a new price equilibrium significantly above historical levels is likely to be seen.”

In the short term, however, some firms could have had their fingers burned by locking in input prices through forward buying last year at a time when prices were rising dramatically. “These players are now seeing sudden strong declines in prices from which they do not benefit.”

Financial instruments designed to help manage risk could help buyers cope in a turbulent market, said Alex Hindson, head of global enterprise management at risk management and insurance giant Aon. But many got into hot water simply because they hadn’t measured their exposure in the first place, he claimed: “It’s not so much a case of predicting what prices will do. It’s about understanding risk: if x happens, what impact will it have on my bottom line?”

Meanwhile, the weakness of sterling had wiped out the gains many UK manufacturers might have made from recent drops in commodity prices, said Food and Drink Federation president Ross Warburton. “Many of our members have got volatile commodities to manage and a volatile currency, so the costs of hedging that have become more and more expensive.”