Business

Commodity price increases bring some benefits to Kansas, but hurts many businesses

Oil prices are way up. So are prices for cotton, wheat, steel, fertilizer, chocolate, and on and on.

All over the world, commodity prices are rising. And while the federal government says that isn't driving worrisome inflation in the U.S., it sure does feel like it for businesses — especially small business — that use a lot of those commodities.

Not all companies are suffering, of course. It depends on which commodities a company uses and how much. A lawyer's office won't feel much of anything, while a trucking company will see real trouble.

Fruhauf Uniforms, 800 E. Gilbert, which makes band uniforms, feels the effects mostly in the cost of shipping.

"It makes it really hard for manufacturers," Richard Fruhauf said.

Companies have gotten better about buying, producing and shipping goods quickly so they don't get stuck taking an order at one price and then producing it later at a higher price.

Darlene Cornfield, co-owner of Carrol's Delivery, said the rising price of fuel is making a dire situation worse for her business.

The price of gasoline on Friday was about $3.25 to $3.30 — up about 35 cents from a month ago and up 70 cents from a year ago.

Her business is "hot shot" delivery, picking up and delivering parts for local companies within hours. She and her husband drive vans all over the region.

Her business was already way off, as many clients have reconsidered whether they really need to pay for same-day delivery.

Now rising fuel prices are squeezing margins on the business she does have. If she tries to pass along the cost, she fears the loss of more business. It's a vicious cycle.

If business doesn't improve, she said she and her husband will have to start looking for part-time jobs to supplement their income.

"In the last three months, we have spent more time together than we have in the last 25 years," she said with a rueful laugh.

What drives prices up

Economists say two things are driving rising commodity prices: growth in the developing world and the decline in the value of the dollar. As the dollar falls in value, those commodities traded in dollars rise in price.

Inflation has become a real problem in developing countries, but less so in the U.S. in large part because wage growth has remained flat. As prices from imported good rise, U.S. manufacturers feel freer to raise prices.

On the other hand, commodities that aren't traded globally, such as most natural gas, remain at low levels.

Benefits for Kansas

The good news is that Kansas, to an extent, is benefiting from the rise in commodity prices.

In 2008, the last time commodity prices were this high, Kansas farmers and ranchers generated $4.5 billion, while oil and gas producers and support industries generated another $1.9 billion, according to the U.S. Bureau of Economic Analysis. The two sectors make up 5.5 percent of the state's economy.

But how much those price increases hurt the economy is harder to figure.

Even farmers, who have seen crop price increases of 50 to 100 percent since mid-summer, have seen sharply higher prices for fertilizer and diesel fuel eat into their profits.

But that makes them among the fortunate ones. Most businesses haven't been able to sell their products for more, said Donna Ginther, director of the Center for Economic and Business Analysis at the University of Kansas.

Businesses adjust

To cope, companies switch suppliers, change to less-expensive alternatives or reconfigure products to use less. But many small companies just have to absorb the cost.

Bigger companies use more sophisticated strategies such as shifting production overseas, currency trading or price hedging.

Scott Redler, co-owner of Freddy's Frozen Custard & Steakburgers, said the spike in beef prices would be hammering his margins right now, except that he hedged the price by locking in his beef prices a year in advance.

"At this point, we don't see much of a price increase," he said. "Value is critical for Freddy's, and this helps us maintain that."

But smaller businesses have less flexibility. Monica Schlegel buys chocolate, flour, eggs and other supplies in bulk as the owner and chief cake-maker at Monica's Bundt Cake Co., 1328 E. Douglas.

She was informed in January by her supplier that the price of chocolate was going up — a lot. She switched suppliers, which helped, but material prices continue to rise.

"Everything has gone up, all of my ingredients," she said.

"My prices have been the same for three or four years — truly. We're just going to ride this out."

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