Saturday, November 10, 2007

Wonder Where Your Money is Going? Here is the True Cost of Higher Crude Oil Prices

Oftentimes people are too focused on what higher crude oil prices will do to prices at the pump. However, the price of crude oil is seen in the full spectrum of consumer goods, from gas, to food, to tires, etc. Now you know where your money is going. Also after you read this you should understand why inflation excluding food and energy is a “bogus” number in today’s environment. From Market Watch:

Let the consumer beware: Costs are going up on almost everything the average American family consumes.

At the same time, the push to develop ethanol as an alternative fuel through corn and similar products is inflating the cost of feed for cows, pigs and other farm animals - and that also increases the prices consumers pay.

"Oil affects everything from top to bottom," said Phil Flynn, energy analyst at Alaron Trading. "Most people wear crude oil every day."

Consumer-product giants ranging from Procter & Gamble Co. and General Mills Corp. to Wm. Wrigley Co.and Bridgestone Firestone North America Tire have warned in recent weeks that the price increases they've already put in place this year could go higher yet.

While consumers likely expect to feel the pain of $100 oil at the pump and when heating their homes, there's a lot of other places they'll feel it too--perhaps as soon as the holiday shopping season. Stacey Delo reports.

"The continuing upward spiral of raw material costs makes this action necessary," said Duke Nishiyama, president of BFNT.

"This unprecedented situation is simply not one that can be managed through the enhanced efficiencies and increased productivity that we are continually implementing at all levels of our company. As a result, we have no choice but to implement this price increase," he said.

Crude oil is among the most versatile products on earth. It comes out of the ground as a honey-colored liquid or a tar-black solid, though it can also emerge as red, green or brown. Refined, it becomes petroleum, rich in hydrogen and carbon atoms, and familiar to most as gasoline or petrol.

Converted into chemicals, the oil and gas become petrochemicals that are used to develop plastic, polyester, rubbers, detergent, and chemical fertilizers and other pesticides. But it's also used in fragrances and lipstick, in candles and telephones, in pharmaceuticals and insecticides.

Petroleum is used to make artificial limbs and soaps, but it's not used to produce dairy products. Cows are. But cows need to fatten up before they're milked and slaughtered, and they're mostly fed a diet heavy on corn. As more corn is directed to energy production, the price for corn has risen and dairy farmers have passed those costs up the food chain.

Those higher feed costs alone have infused an extra $47 a year per person into grocery bills, according to an Iowa State University study in May.

And don't forget: Farmers sow crops with tractors and use trucks to haul goods, all of which are fueled by diesel. Those higher transportation costs also get pushed up the food chain.

Consumers at the supermarket check-out counter see that they're paying sometimes record-high prices for milk, cheese and yogurt at the same time that the costs of Tide, Pampers, Ivory soap, M&Ms and Cheerios are creeping up.

Consider these recent price hikes:

Wrigley - traditionally conservative on pricing - raised prices 10% in the second and third quarters on its popular gums and candies.

Hershey Co., whose Chief Operating Officer Dave West was one of the few consumer-product executives to crow that "consumer spending has been up this year and it's going to be up again next year," raised prices by about a nickel a candy bar in April. On an earnings call last month, Hershey said it may very well jack prices again in January when there's a "better view of the commodities situation."

Kraft Foods Inc. Chief Executive Irene Rosenfeld told investors last month that she's had to raise prices to cover what food companies call "input costs." Those are the raw materials used for food as well as resins for containers. Wax, for example, is used in packaging frozen foods.

Procter & Gamble lifted its prices on Folgers Coffee blends by 8%, and by 9% on fabric softeners such as the Downy brand. Last month, Chief Financial Officer Clayton Daley said more price hikes are coming, including a 5% to 12% increase on Olay and Ivory personal cleansing products in January; a 5.5% rise on Bounty and Charmin paper products in February; and increases of 5% to 9% on Pampers disposable diapers and 3% to 5% on Gillette blades and razors, also in February.

"They are not sticker-shock increases," he said on an earnings call. "Consumers have seen much larger increases in other things they buy than what they are buying from us," he said.

Lattes and Frappuccinos laced with lots of milk prompted Starbucks Corp.
to boost prices by about 9 cents a beverage earlier this year. In October, Starbucks added another 5 cents, on average, to beverages to cover the rising costs of labor and energy.

Also in October, Colgate said prices on its Hill's pet food business were headed higher by 6% to 8% in the fourth quarter.

General Mills has taken two tracks. One is to raise prices on products like Yoplait and Green Giant vegetables. The other involves a combination of shrinking the size of cereal boxes of Lucky Charms, Wheaties and other Big G brands while increasing the price for each ounce. As a result, shoppers saw the price per box drop but they got fewer bowls of cereal.

In September, Chief Executive Steve Sanger said he's not afraid to push the pencil again.
"We are actively monitoring the need to pass along additional input cost pressures as they arise," he told investors on an earnings call.

Another example of those cost pressures: Farmers' tractors and trucks are outfitted with tires, the prices of which have jumped. In March, BFNT inflated the prices of its Bridgestone, Firestone, Fuzion and other tire lines by about 5%.

Cooper Tire & Rubber
raised its tire prices 5% in June and another 4% on Oct. 1. Chief Executive Roy Armes said the company will keep taking the "necessary and appropriate actions" to protect its profit margins.

Though raising prices can turn off customers and push them away from even favorite items, company executives aren't afraid of a consumer backlash.

"There is not going to be much customer resistance because they are seeing the same energy and commodity cost increases," P&G Chief Executive A.G. Lafley told investors.
"We're not talking about high out-of-pocket prices for consumers here, and we're talking about staples," he said.

Yet, a dime here, a dollar there and it all adds up to more pressure on consumer spending.

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