How Will Commodities, From Oil to Soy, Affect Consumer Goods Companies?

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WASHINGTON, D.C. -- Without developing long-term sustainability strategies, companies that make food, beverages and household items could face a range of financial losses, according to a report imagining a future with stringent climate change, forestry and biofuel policies.

“Rattling Supply Chains,” by the World Resources Institute and consultant firm A.T. Kearney, says that companies in the fast-moving consumer goods industry could face earnings reductions of 13-31 percent by 2013 and 17-47 percent by 2018 if they don’t plan for possible scenarios that would increase the price of or reduce the supply of key resources.

The report looks at how possible legislative, policy and environmental changes could impact prices of oil, natural gas, cereals and grains, soy, sugar, palm oil and timber.

The authors named the future scenario “Ecoflation,” and it’s key components are: U.S. and international climate change policies create a global price for greenhouse gas emissions, climate changes create water scarcity in major agricultural regions, major consumer product companies in the U.S. and E.U. agree to source all wood and pulp from sustainable forests and use recycled content in all paper products, and major biofuel-using countries create sustainability requirements within biofuel legislation

The authors also provide a few steps for how to begin developing strategies for coping with these possible scenarios:

· Understand environmental impacts and dependencies by looking at how environmental trends could impact costs, and, when possible, seek alternatives with lower impacts

· Inventory the sustainability initiatives of the company, its suppliers and partners

· Prioritize environmental issues and opportunities based on current and future impacts to cost, revenue and reputation

· Evaluate how to reduce exposure to cost variations by redesigning products, examining local versus global sourcing and increasing sustainability standards for suppliers

The report focuses on the industry that provides food, drinks, and personal and household care items because those companies rely on commodities that can, and have, experienced volatile fluctuations or drastic increases. From 2006 to 2008, the average world price for oil rose 110 percent, rice rose 217 percent, wheat went up 136 percent and soybeans increased 107 percent.

The fast moving consumer goods industry is also reliant on resources tied to the environment, as well as reliant on demand from ever-changing consumer trends.

“The results highlight the need for strategic scenario-based planning,” said Daniel Mahler, a partner with A.T. Kearney and one of the report authors. “Winning companies will anticipate this changing landscape.”

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