The Price you Pay for Commodities (Managing Price Volatility)

Prices for commodities across all sectors have been more volatile than ever over the last two years. While there are signs of slow recovery in some markets there seems to be no relief of the continuing pressure on prices. Some of these changes can be attributed to heightened production and a reduction in demand.

The agreement by OPEC (Organization of the Petroleum Exporting Countries) to reduce crude oil production has already seen an increase in the spot oil prices. It is anticipated that demand for oil may fall due to slower growth in advanced economies and China. Going in to the colder weather, natural gas prices in the US have increased while prices in Europe have not. Coal prices have increased, mainly due to disruptions of supply in Australia and China.

Metals have continued their downward trend due to concerns about over supply and existing large inventories. Two exceptions are tin and lead; they have hit a two year high reflecting concerns about decreased production in China.

In agriculture, September saw a decrease overall for the third month in succession. The expectation of exceptional yields in several growing regions, particularly in the US, have seen prices for corn and soybeans. Wheat has also reduced, again on the back of increased yields in India, Russia and the US. In contrast, coffee and sugar have seen increases due in some cases to adverse weather conditions in some regions.

So what does all of this mean? In short, it is safe to say that price volatility in the markets will continue, creating challenges for trading organizations to determine pricing strategy and for manufacturing companies to manage the cost of their raw materials. Organizations are looking for more and more ways to minimize risk, maximize profit on their commodity business. This leads to less fixed price deals and to more ways of quoting and pricing raw materials; a classic example is agreeing to pay 5c per bushel above Chicago Wheat price for December 2016. The price is variable thereby taking account of market price fluctuations while locking in the premium to be paid.

With more and more variable pricing methods, commodity traders and manufacturers who are evaluating traditional ERP solutions need to ensure that their chosen solution is adept at dealing with these types of prices. Scalable offers an ERP solution suitable for commodity traders and manufactures. Microsoft Dynamics AX with Scalable Commodity can handle these pricing mechanisms and carry them through to landed costs, valuation, and profitability reporting. Contact a Scalable consultant if you’d like to learn more about about  Microsoft Dynamics AX with Scalable Commodity. 

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