10-year commodity supercycle's end in sight?
Pete Tsudis says buying cocoa, fruit and nuts for his chocolate and nutrition bar manufacturing business is so risky that he had to find a way to insulate his company from the worries of complex commodity transactions.
Prices of most commodities surged in recent years, and Tsudis Chocolate Co. in O'Hara is especially affected by high prices for almonds, Tsudis said, driven by demand from China, Spain and other countries. He looked for a different way of keeping costs as low as possible.
Since 2005, a pound of cocoa doubled to $1.75 or higher and almonds doubled to nearly $4 a pound — a small but enlightening part of the global food commodity market where overall prices have risen nearly 85 percent through May, according to the International Monetary Fund.
Prices for food, metals, energy and products of all kinds have more than doubled during the past decade, IMF figures show.
That long-term trend, called the commodity “supercycle,” may be coming to an end, experts say, as demand from China and the global economy slows. Higher prices boosted expansion and output.
That doesn't matter at Tsudis Chocolate, a contract manufacturer for brand-name companies.
Twelve years ago when Tsudis joined the company his father founded, it had 30 workers and “couldn't afford a commodities desk.” His dad, Spiro “Speed” Tsudis, was the expert, drawing on years of experience as a commodities buyer at Beatrice Foods Co. and D.L. Clark Candy Co. in Pittsburgh.
“He was really good at it. He knew all the vendors,” Pete said of his father, now 80.
Instead, Pete Tsudis, 47, uses an open-book-pricing model: “I tell our customers the costs of their bar product per pound. When I give them a price, there's nothing hidden. We make joint decisions on prices and negotiate a margin for our profit. Customers appreciate it, and we love that model.”
His company increased employment to 215 and sells as much in two weeks as his dad did in a year. He's adding products such as meal replacement bars and will change the name to TruFood Mfg. Inc. on Sept. 1 to reflect that.
“My job is to make chocolate really, really well, not focus on commodities prices,” Tsudis said. “If you can find a person who knows where prices are going, I'd like to meet them.”
An IMF report says global commodity prices peaked in April 2011 but remain high compared with historical levels. Since then, prices have been volatile, declining 12 percent in June 2012, then rebounding because of supply shortages and some improvement in demand.
The IMF's outlook for 2013 predicts an overall decline of 2 percent compared with last year, as food and energy prices fall and metals prices increase.
“What matters most is what's going on in the global economy, rather than in the United States,” said Gus Faucher, senior economist at PNC Financial Services Group. “We are seeing Europe remain in a recession. ... In China, growth has slowed, and while it's still strong by U.S. standards, it has weighed on growth in Asia. Overall, we're seeing slower global growth.”
Analysts at Citigroup in a May 20 report predicted the death of the supercycle this year, saying commodity prices will end the year lower.
“For the next few years, each commodity looks more likely to be sitting on its individual supply/demand fundamentals than on more general factors affecting all of them,” said Edward Morse, head of commodities research at Citigroup.
“The first quarter provided a clear precursor of what's likely to come — the majority of commodities saw prices fall across the board, and those that rose did so for commodity-specific reasons,” Morse said.
The recovery in the housing market boosted lumber prices more than 19 percent from their trough in June 2009, said PNC's Faucher. The producer price index for lumber and wood products from the Bureau of Labor Statistics hit an all-time high in April, then fell slightly in May, but was still very high on a historical basis, he said. Lumber and wood products prices also were up 6.6 percent in May from a year ago, he said.
The price of gold sank to its lowest level in nearly three years last week as the precious metals bubble continues to pop. Gold suffered because investors continue to mull comments from Federal Reserve Chairman Ben Bernanke indicating the central bank's huge stimulus might be winding down.
“Everybody is a little bit shocked right now,” said Eddie Lowy, owner of Banner Coin Exchange, Downtown. “Right now, we're in a bear market in gold. Business is pretty much at a standstill.
“We had a two-and-a-half-year run of people selling gold and silver,” Lowy said. “All those people who sold no longer have anything to sell. There are still people out there with lots of gold and silver, but mostly middle- to upper-class. They don't need the money or to sell, and they sure are not going to sell with prices down 50 percent.”
At Tsudis Chocolate, the focus is on making the best use of commodities it buys.
Tsudis said he hired a supply-chain financial analyst and a strategic planner for purchasing and planning, to make sure that “most of what comes in the door goes out the door, too.”
That means knowing how the cocoa, fruit and nuts are used.
“All of our focus is internally driven and a lot less on figuring out commodities prices,” he said. “Chocolate is so expensive, you can't afford any material loss. The rise in commodity prices has made everyone in the industry cognizant of what it costs not to be efficient.”
John D. Oravecz is a Trib Total Media staff writer. He can be reached at 412-320-7882 or firstname.lastname@example.org.