Why Care about Commodity Prices?
by Brainy Becca
Many commodity prices are hitting record highs, notable among them are oil, corn, and wheat. Aside from the fact that it's costing you more to fill up your car lately, you're probably thinking, why do I care about commodity prices? The answer is simple: these commodities factor into almost every product or service sold!
Petroleum is a raw material in everything from sweaters to floor wax, cosmetics to golf bags, shoes to house paint. The price of oil also affects transportation costs, or what it would cost a retailer, for example, to transport goods from a warehouse to stores. Gasoline prices are also keeping consumers from shopping for anything other than staples.
So, what about corn and wheat? These are key to animal feed and rising feed costs mean more expensive animal products like the ham in your sandwich and the leather for those new strappy sandals on your feet.
Using retail as an example, let's say that these rising commodity prices have caused your suppliers to raise their prices and hence, your cost of goods sold (COGS) rises by 1%, which doesn't sound like much, right?
Wrong! Would you believe that a 1% increase in COGS could result in a reduction of 18% in your operating income margin? Holding all else the same:
So keep this table in mind as we find that a small rise in commodity prices can result in a significant decline in your profitability!