Companies Stock Up Ahead of Price Increases

Here is a good article from today's WSJ ("Companies Stock Up as Commodities Prices Rise") that highlights the self-fulling prophecy of higher prices. With the price of rubber, cotton, spices, and other commodities rising to new highs over the last few months, anxious customers are accelerating their inventory purchases to try and get ahead of additional price increases. Similar to what we experienced in mid-2008, when panicky restaurant owners drained Costco shelves of bags of rice, scared businesses are accentuating the inflationary spikes by collectively buying far more than the underlying demand in their businesses would suggest is necessary.

Its difficult to say how long this could go on - and zero percent interest rates are certainly not helping - but unless end market demand truly picks up, its hard to justify this frenzied activity. In 2008, we had a good 3-4 months where it seemed like everyday the price of most commodities was moving higher. However, as Jim Grant is fond of saving, "the cure for high prices is high prices" and you can be sure that at some point high prices will break the back of this inflationary pressure.

As can be expected, the Fed's head is firmly buried in the sand and it remains highly unlikely that they will raise interest rates anytime soon. With home prices trending lower and unemployment stuck at 9.5%, Bernanke can care less that copper and rubber prices have tripled since early 2009. However, no matter how clueless the Fed, they cannot repeal the laws of supply and demand and any investor chasing this commodity spike higher ought not to forget what happened in August 2008 when reality finally took hold in the market.

This anecdote from the article perfectly captures the frenzied behavior of businesses across the country:

John Anton, Anton Sport's founder, saw the price of cotton shooting up, and decided to act. Last month, when his T-shirt suppliers warned about the fourth price rise in six months, he borrowed $300,000 through his home-equity line of credit and bought more than a year's supply. Mr. Anton typically has about 30 boxes of shirts on hand at one time, but now has more than 2,500.

"It just kind of clicked that I can borrow at 2.45%, and if cotton is going to go up between 10% and 12%, why wouldn't I do this?" Mr. Anton said. Cotton prices rose 92% last year, and are up 22% this year.

Mr. Anton, the T-shirt seller, bought mountains of shirts after receiving letters in January warning of an imminent price increase. One supplier's letter, a copy of which was reviewed by The Wall Street Journal, urged customers to "wrap up most of your pending orders and buy at the best possible prices."

"What's exciting here is we can now go to somebody like McDonald's and say: 'We have a price that's going to beat everyone around,' " Mr. Anton said. "At this point, I don't know if I'm the smartest guy in the room or the dumbest. But I can't see prices returning to where they were anytime in the near future."