Rising commodity prices strain corporate supply chains

The rising price of industrial and agricultural commodity futures is straining the ability of many firms to maintain their margins without raising prices. A price increase will always be the last resort, particularly when consumer spending remains depressed and lines of credit are drying up for many buyers. Yet retailers and manufacturers have to find some way to cope with the rising costs of cotton, silver, aluminum, wheat, corn and rare earth metals.

Nate Herman, the vice president for international trade at the American Apparel and Footwear Association, recently told Bloomberg/Businessweek that "there's just not any room left to take it in margin." The apparel trade has been hit particularly hard – cotton futures have surged over 50 percent this year, setting new nominal price records. In addition, a general increase in the pace of inflation in China has pushed up labor costs – and so, despite weak demand, garment companies will be forced to boost prices.

That brings clothing back into line, to some degree, with the prices of other retail goods; from 1998 to 2008, writes the magazine, overall prices increased 28 percent, but clothing prices dropped 10 percent. New technology and new manufacturing markets helped slim down margins and let clothing companies cut costs.

Food is another area that's in the process of undergoing a transformation. In 2007 and 2008, the rising price of oil, rising demand from emerging markets and the conversion of food crops into fuel like ethanol boosted the prices of staples like rice, wheat and corn. When the global economy cratered late in 2008, that trend reversed somewhat, in large part because the price of oil plummeted and overall demand sank.

Oil is back on the way up, with serious analysts calling for crude oil futures above $100 per barrel, while others project that energy prices could rise even higher if peak oil sets in.

China, with its state-controlled economy, is moving to contain these price increases as much as possible – paradoxically, it's in the best interest of the Chinese government for American consumers to continue paying low prices for goods like flat-screen TVs and Nike sneakers. Inflation in China is officially just shy of 4 percent, and many suspect those numbers have been massaged. 

In higher-margin industries like technology, new concerns come into play – and once again, China appears to be in the thick of it. For instance, most of the world's rare-earth metals are mined in China, due to lower labor costs and unbelievably lax environmental standards. China imposes steep import quotas on the market – and when it wants to, it can cut off the supply completely, as it did to Japan during the summer. 

These minerals – things like neodymium, which is used to make magnets – are key to the functioning of most modern computers. And while the rising prices create incentives to develop new sources, in the meantime, they can result in more expensive goods – which translates into lower consumption.