Tag Archives: currency fluctuation

Commodities Could Be Trouble in 2017

money-crop

Have we been lured into complacency with commodities that have fallen over the past year impacting cost of major raw materials and our profitability? With corn over 40% down, copper 38% down and wheat more than 30% down, it is apparent that we have enjoyed significant market opportunities. Having traded commodities in my career, I know that commodities run on a cycle and the good times may be close to an end. A good example of commodity cycles is peanuts, where prices rose 33% in 2016, but bumper crops were expected in the current season, which should drive prices down. Today in the Spend Matters guest post US Peanut Prices Increase More Than 30% in 2016, Mintec noted persistent rains in China have caused high moisture levels in the peanut crop, which will greatly affect quality and price.

In a Bloomberg report on Barclays Black Swan Threats to Commodities, there is upside risk for raw materials in 2017 and the likelihood of further upside risk based on radical changes in the global economy, energy markets and global political risks on trade. Another dynamic that could impact all buyers involved in international trade is the opportunity and potential for disruption and risk posed by currency. With Switzerland announcing that it’s abandoning its peg to the Euro, the unknown impact of Brexit and China changing how exchange rates are fixed, it could signal volatility.

In many companies, procurement and finance have a joint obligation to protect the company’s profit plan. The goal of managing commodities and currency is not to speculate, but to assure the profitability across the organization is maintained. If you’re planning a commodity or currency strategy, here are three approaches to consider:

  1. Cover 70 to 80% of the plan, leaving 20 to 30% flexibility to move with key markets
  2. Develop formula-based pricing levels
  3. Work with finance to build currency hedging by buying foreign currency or by changing contract pricing to US dollars

It does make sense to look on the horizon for any currency or commodity that might pose potential risks and build the plan prior to any change in market pricing. There is no doubt that 2017 will bring a new frontier to global trade and it’s best to be prepared, rather than be surprised.

How will you manage volatility should it arise?

Recession – 5 steps to take now

rough road

Are you prepared? What is your plan?

This week has been a week like no other as the stock market reacts to falling commodity prices, interest rate changes and devalued currencies. Bloomberg Business published an interesting article, “China may tip the World into Recession: Morgan Stanley”, that points out that a continued slowdown in the next years may bring global economic growth below 2%. Ruchir Sharma, head of emerging markets for Morgan Stanley Investments, views this as the threshold equivalent to a world recession.

While this is a bold prediction, it should serve as a warning to procurement and supply chain practitioners to dust off and review risk management plans. In any recession, where volumes are dropping, inventories are growing and cash management becomes critical, it is necessary to assure that the supplier network can withstand financial stress.

It’s also wise to do a complete contract review with both leverage and strategic supply sources. It will be smart to assure that the volumes are not overcommitted. In addition to reviewing contracts and volumes, building scenario forecasts can help a company to determine options and strategic directions. Now would be a good time to understand the impacts of currency changes on both the buy and sell side of the transactions. The savvy purchaser will align the supply chain with the impact of the customer’s terms and conditions on currency; in other words, understand the currency risk end-to-end and plan accordingly.

Review contracts with customers, too, to understand what commitments are being made to customers and take the opportunity to solidify some of the future orders in advance. Another practice I recommended, as we approach a potential recession, is business reviews with suppliers and customers.

Economists will argue for many years whether we’re approaching or are in recession. One of the worst things managers can do when the world is dipping into a recession is to take no action. Personally I like the Boy Scouts motto: “be prepared.”

  1. Review and update all risk management plans
  2. Review all customer and supplier contracts
  3. Build best and worse case scenario forecasts
  4. Understand all international contracts adjusting for currency fluctuations
  5. Audit the supply chain

What’s your strategy?