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Joshua's Beginner's Investing Blog

By Joshua Kennon, About.com Guide to Beginner's Investing since 2001

Commodity Prices Hurting Consumers, and the Gross Margins of Many Corporations

Wednesday April 30, 2008
The recent surge in commodity prices such as corn, wheat, soy, and rice shouldn't be much of a surprise to anyone who reads annual reports on a regular basis. This past Christmas, my family and I had several discussions that the average American probably didn't realize the price increases that would be hitting the grocery store in the coming six to twelve months where they were clearly, and quite plainly, spelled out in the financial reports of businesses such as Kellogg's, General Mills, Kraft Foods, Sara Lee, Starbucks, and countless others. The price of wheat alone has tripled over the past three years, causing tremendous challenges for the folks running bread-based restaurants and stores such as Panera. Moves like that typically crush gross profit margins, which are important to the bottom line and, ultimately, the return on equity.

For now, what can you do to protect your pocketbook? In the short-term, very little. As one commentator accurately pointed out to viewers, the world has gotten remarkably good at growing food. These price levels will be far too appealing to farmers who will quickly adjust their output and crop choices to maximize their own profits which will, in turn, move us further up the supply curve, lowering prices. That may take two or three years. In the meantime, if there are businesses that you really want to own with long histories of share repurchases, cash dividends, able and honest management, and a product you understand, now may be a good time to begin buying shares. Ten years from now, it's highly unlikely anyone will remember the short-term price situation of food and you'll have built an ownership stake in the firms.

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