Fortune is telling the story of how raw costs are starting to weigh on corporate profit margins. History tells us that eventually the raw costs will be passed on to consumers in the form of either smaller packages or higher prices. Or both.
The commodities crunch is corporate America’s dirty little secret. Even as consumers open their wallets once again and sales volume improves, inflationary pressure is creeping in. It’s hitting companies small and large. And even giant corporations with plenty of heft to negotiate the best possible rates from suppliers are feeling the pinch. Procter & Gamble’s (PG) chief financial officer, Jon Moeller, told us on Squawk Box that the consumer-products giant saw a 160-basis-point impact from higher input costs late last year. For now, P&G has offset that rise with its productivity and cost-saving programs.
That can’t continue indefinitely, of course. Commodities prices continue to skyrocket — last year crude-oil prices were up 17.3%, sugar climbed 25.5%, and wheat rose 49.3% — and eventually will start seriously chomping into corporate profits. (Not that investors have noticed: Thomson Reuters has analysts forecasting a 13.4% climb in corporate profits in 2011.) “Either the revenue picture will start increasing more rapidly over the next few quarters, and that will offset higher costs, or profits will get hit,” says Ashwani Kaul, head of his own investment advisory firm. “Something has to give.”
Don’t sleep on this stuff, you will hear more about it this spring. I’m having a lot of fun riding agriculture commodity stocks and ETFs all year but you know what they say about having too much fun. At a certain point, people, not just companies, are going to feel this.