Even the laws of supply & demand agree that one of the stars of the meat industry (life?) is bacon. The price of pork bellies may have been rising for some time but according to the Wall Street Journal, in 2016 alone pork belly prices rose a whopping 80% while frozen inventories decreased 60%.
The article states, “Some analysts say bacon is becoming a yearlong staple that consumers are eager to procure. That voracious demand has left wholesalers in a squeeze. Retailers “have turned hand-to-mouth, buying only what they need, waiting for production to increase and prices to decline,” said Dennis Smith, a commodities broker at Archer Financial Services in Chicago.”
For companies whose profit margins are impacted in some way by the pork belly market (processors, further processors, retailers, distributors, foodservice) that 80% price increase is likely leading some folks to either a Tums addiction or some sweet bonuses, depending on the company’s position in the market.
Significant price movements raise some questions about managing uncertainty in commodity markets:
- How would processors have been able to capture more value had they better anticipated the market spike? How would retailers have been able to manage costs better?
- When analysts at pork buying or selling companies were forecasting market prices, to what extent did they consider the probability of a market increase this high?
- What contingency plans were in place - for either side of the market - if prices were to spike 80%? Fall 40%?
- Now that the pork belly market is so high, what is the optimal forward sold position for pork processors? Optimal purchasing mix (formula vs spot) for buyers?
These are the types of questions DecisionNext is helping companies wrestle. Increasingly volatile commodity markets make forecasting difficult but finding ways to productively manage that uncertainty while making significant business decisions - like how/when/what price to buy or sell product - is the key.
What tools do you use to manage uncertainty in commodity markets?
DecisionNext is a prescriptive analytics company that turns market forecasts into recommendations for business decisions - the “so what” of forecasting.