Entries for 'Food and Beverage'

Ahh, the nicer weather is upon us and summer is finally here.  No better time to ice up the beverages and slap some burgers, hot dogs, chicken, and other select meats and vegetables on the grill.

Now that you have this great visual, take a moment to stop and think what it really costs to get an average barbeque together before it hits the grill. 

Rapidly rising and volatile commodity prices are causing fluctuations in the cost of the raw materials, packaging, and energy that food and beverage companies must purchase in order to provide the ice cold beer, potato chips, ketchup, and other barbeque staples. When food and beverage companies aren’t properly equipped to manage this volatility, the result is reduced profit margins, and oftentimes higher prices.

For example, the ketchup that is put on hamburgers contains commodities such as tomatoes, sugar, salt, and corn syrup. When the price of wholesale tomatoes more than tripled back in 2011, Heinz cut portions of several key products, including its flagship Heinz 57 sauce, which now comes in a bottle that has shrunk by four ounces, but costs the same as the original, larger bottle.  

While passing along increased costs to consumers is a very common practice, there are other options. Companies including Heineken are taking advantage of advanced technology solutions to minimize the impact of commodity volatility on their bottom lines so they don’t have to pass along price increases to the consumer.  These solutions, which include Triple Point’s Commodity XL Strategic Planning and Procurement™, provide customers with powerful tools for fully mitigating and managing commodity exposure. Companies that don’t invest in the technologies and processes to properly manage this exposure will lose out on a significant competitive advantage, and risk being left behind.

Triple Point will join CPOs from Barilla and Chesapeake Packaging on a  webinar panel on April 18th, to discuss commodity risk and potential solutions. For more details, click here.

Did you see the recent headline: Samoa Air to price tickets by   passenger weight?  All fat jokes aside, the underlying logic for the pricing change is so Samoa Air can find the best way to manage jet fuel costs.  Each pound shed from a plane saves the company 14,000 gallons of fuel each year.  At roughly $3.03 per gallon, that’s $42,400 per year that drops to the bottom line for every one pound reduction.



Analysts have been bifurcated in their opinions of Samoa Air’s new pricing scheme with some thinking it’s a brilliant idea and others that believe it can’t work.  I’ll leave it to the pundits to debate the pros and cons of the best way to price airline tickets.  But the concept of finding new ways to manage commodity risk is not at all surprising.  Managing commodity input costs is the next major challenge for many organizations.



It’s not just airlines that have the daunting task of managing commodity input costs such as fuel.  Faced with fundamental changes in the commodities and energy market environment, most manufacturers, including beverage, food, CP, chemical, and industrial, are wrestling with the best approach to protect margins from volatile and rising commodity costs.  The risk runs a wide gamut of costs including energy to run plants and distribution fleets, raw materials that are inputs to products, and packaging for finished goods (e.g. aluminum, cardboard).  Commodity costs are a major percentage, and the most volatile, of a manufacturer’s spend.



To preserve margins, manufacturers must move quickly to approach commodity procurement differently and more proactively than ever before. While not traditionally viewed as commodity trading organizations, manufacturers can learn from leading commodity trading houses and adopt new processes, tools, and measurements required to optimize raw material acquisition while ensuring compliance with new regulatory demands.



It’s shocking, but I still find many companies that manage commodity risk in spreadsheets.  Today’s complex and volatile markets require Procurement to use sophisticated software tools such as Commodity XL™ from Triple Point to not only ensure coverage, stay within budget, and deliver the material when manufacturing needs it, but also to analyze commodity risk and perform scenario analysis.  The new benchmark for procurement organizations is how well spend is managed relative to market prices and competitors, not just how well the budget is managed.



As I said, Commodity Management is the next big thing…

The US Midwest is suffering its worst drought in decades.  The US Department of Agriculture (USDA) recently dropped its corn yield forecast from 166 bushels per acre, made earlier this year, to 123 bushels per acre.  The expected shortage of corn is causing prices to surge.

Corn has multiple uses – it is used as fuel (ethanol), animal feed, or directly as food.  Roughly 40% of US corn production goes towards ethanol, 36% towards feed, and the rest towards food.

There are several concerned groups that believe the Environmental Protection Agency (EPA) should relax the ethanol requirement under the Federal Renewable Fuels Standard act, which states that there must be 13.2 billion gallons of corn starch-derived biofuel produced in 2012.  The UN has called for an immediate suspension of the US-mandated use of ethanol.  In addition, a coalition of beef, pork, and poultry producer associations have called for a cessation of the ethanol requirement.

Whether the EPA will ease the ethanol requirement is not the most important question – the real question is how do we plan to deal with rising agricultural commodity prices and volatility in the long term? The corn shortage might be a one season event, but volatile agriculture and softs prices are here for the long term. 

We have an expanding world population that is forecasted to grow from 7 billion to 10 billion in the next 35+ years.  As part of this population growth, there is a rapidly growing middle class across China, India, and other parts of Asia.  China and India alone are doubling their per capita incomes at approximately 10 times the rate and 200 times the scale achieved by Britain’s Industrial Revolution in the 1800s.   This growing middle class wants to eat higher on the protein scale (more meat which needs more animal feed).  And it appears we’ve hit a pattern of severe weather events including droughts, floods, extreme temperatures, etc.   These long term trends will drive acute commodity price swings – which is, as we’ve said before, the new normal.

All companies in the food supply chain, from upstream to downstream, should be putting plans and commodity risk management systems in place to handle price volatility.

Events

Procemin 10th International Mineral Processing Conference

October 15-18, 2013 | Chile

XXV Brazilian National Meeting of Mineral Treatment and Extractive Metallurgy (ENTMME)

October 20-24, 2013 | Brazil



Opinions expressed on this blog are those of its individual contributors, and do not necessarily reflect the views of Triple Point Technology, Inc.