The following topic will be addressed in this post:
The impact of rising commodity prices on business.
Commodity prices are on the rise. Some industrial and agricultural products have reached record highs. Commodity prices are global so they affect all markets. These price increases can have significant impacts on businesses in both microeconomic and macroeconomic terms.
Why have prices risen?
The reasons are complex and differ among the commodities. I will mention a few factors here. First, we have the simple economics of supply and demand. For example, some of the agricultural products have suffered poor growing seasons, thereby reducing global supply. Also, the growth of emerging markets has increased demand for some commodities where supply is not able to be increased quickly, such as oil. Second, the Fed’s accommodative money supply policies play a role. Because commodities are dollar denominated, a weaker dollar can inflate commodity prices. Third, trading speculation surely has some impact on commodity prices. People trading these contracts and items want to make money and they see opportunity to test what the market can bear because global growth requires these commodities. Fourth, investor uncertainty has created a “flight to safety” in precious metals. Quite simply, people feel that precious metals and similar commodities will hold value and can be traded as currency in the event of stagnant or recessionary conditions. As I said previously, these are only a few of the factors affecting prices and they affect different commodities in differing ways.
What does the commodity price rise mean for firms?
The impacts will vary on the firm. Obviously, commodity producers or suppliers are benefitting from the high prices. Not only do the higher prices bolster their bottom lines, but they also create conditions that allow some commodity sources to be utilized that might otherwise be economically unfeasible. On the other hand, for firms that use commodities as inputs, the rising prices will require these firms to absorb the costs and tighten their margins or to pass the costs through to customers. Indeed, some firms could be greatly impacted as customers with inflexible incomes make spending decisions.
What about the future for businesses?
The business environment will be tougher. Some commodity producers may face increased competition if prices stay high and competitors can enter the market. Some commodity prices may fluctuate with time if production conditions improve, and this will be especially true of the agricultural commodities. Until commodity prices drop, firms that use the commodities as inputs will have difficult choices to make. Also, these prices create difficulties for entrepreneurs when attempting to calculate and to secure funding requirements for their businesses.
At a minimum, firms will have to adapt their expense calculations for an environment with fluctuating but likely persistently elevated commodity prices. Some firms might be able to find innovative methods for circumventing the elevated commodity prices, for example using alternate inputs or creating purchasing groups to buy in higher volumes. Some firms may be able to turn to local suppliers to at least keep the money flow within the local economy. Some firms may have to change their business models in part or entirely. True, the business environment will be tougher, but this type of situation can also be a crucible for innovation.