- - Thursday, September 23, 2010

ANALYSIS/OPINION:

Earlier this week, Starbucks Corp. announced that it plans to charge more for large-sized and labor-intensive drinks because of surging prices for coffee and other commodities. The spot price, which is the price quoted for immediate payment and delivery, for a pound of Colombian coffee rose to $2.43 this week, up 32 percent from $1.84 this time last year. Other closely watched coffee crops, such as the one in Brazil, also have seen a strong move higher in their respective spot prices. All in all, coffee prices are at the highest level since 1998 per data from the International Coffee Organization.

Tracing back the news flow over the past few weeks, we find that other companies already have increased their coffee prices. On Aug. 3, J.M. Smucker Co. boosted prices for most of its Folgers, Dunkin’ Donuts, Millstone and Folgers Gourmet Selections coffees in the United States by an average of 9 percent. Soon after, Kraft Foods followed with U.S. price increases on select Maxwell House and Yuban ground and instant coffees.

I love my coffee, I really do, but these price increases at Starbucks would not be oh-so alarming to me if they were the only ones. That, however, is not the case.

Nestle, which makes pantry staples such as Kit-Kat chocolate bars, Haagen-Dazs ice cream and Nestea iced tea, this month predicted a “challenging” second half because of rising commodities prices.

Not much of a surprise when one looks at commodity cash prices assembled by the Dow Jones Market Watch Group, which showed an average year-over-year price increase of 27 percent across more than 80 commodities. The top three increases were for wheat, corn and butter, all of which were up significantly compared to the average. To be balanced, there were some price declines compared to last year — for five of the more than 80 commodities — steel scrap, cottonseed and soybean meal, bone meal, eggs and Ivory Coast cocoa.

What surprised me even more than how widespread the rise in commodity prices has been was how many companies seemed to be caught flat-footed. In June, IRN Inc. published a report that was compiled from 202 surveys received from 170 companies buying a wide array of raw materials, including steel, aluminum, plastics, copper, rubber and others. At the time of the report, the majority of survey respondents expected material price increases between 1 percent and 20 percent for 2010 compared to the average price paid in 2009.

Yet, since the time of that report, we have had a regular flow of companies announcing price increases in response to rising raw-material prices. These companies are found not only in the U.S., but in other countries as well.

In Asia, for example, rising pulp raw-material prices have had an impact on the toilet-paper industry, and it is beginning to appear at the supermarket. Also, copy paper, wrapping paper and waste paper have all pushed higher. Plastic and fabric prices have risen by a fifth in the past year, and this has led to price increases at Asian toy manufacturers.

Amcor Flexibles Europe & Americas recently raised prices for most flexible packaging, effective Sept. 15, in response to a “recent and dramatic rise in raw material costs.” In some industries, such as the ink industry, this is but the latest round of raw-material price increases. Over the past two years, prices of many types of raw materials have increased — ranging from 10 percent to 40 percent for pigments, 10 percent to 150 percent for resins, 5 percent to 10 percent for additives and 15 percent to 30 percent for solvents.

As a result of these ongoing input-cost increases, Siegwerk, a world-leading supplier of printing ink for packaging and publications, announced a 4 percent to 8 percent price increase on all packaging inks sold in the U.S. and Canada, effective Nov. 1.

Closer to home and to most consumer wallets, the spot price of cotton has leapt 35 percent to more than $1 a pound. Moreover, this is the fifth year in a row that cotton consumption is expected to outstrip production, according to the Agriculture Department.

This underscores an important point to consider when contemplating commodities and other raw materials. Certain resources, such as cotton, coffee, corn, wheat and others, are limited in terms of availability each year, but there is demand for some or all of these commodities across the globe. Factor in growing demand in some countries, a rising middle class with rising disposable incomes in others, and prices will reflect the balance or imbalance of global supply and demand.

I plan to keep a closer eye on these rising raw-material costs for two reasons.

First, should these higher prices stick, it could raise costs and hurt profitability. After all, the weak economy makes it harder to pass along higher prices to consumers. Second, given unemployment and consumers’ desire to rebuild savings levels, coupled with higher prices for certain goods and services, I see it as pretty likely that the consumer may have another round of spending cuts in order to buy what he or she considers necessities over nice-to-haves.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm located in the Washington, D.C., area. He can be reached at cversace@ washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.