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FI Insights

Manage Raw Material Price and Plan for Success During Budgeting Season

September 16, 2020

Raw material price volatility is perhaps the single biggest enemy of successful budgeting for manufacturers. Extreme price volatility and market speculation, even if temporary, can undermine resource planning initiatives and erode margins.

In the global forest supply chain, an increasing number of manufacturers are now operating in an environment where price volatility for end products (the result of panic buying) has been high and the cost of capital (and therefore the cost of holding inventory) is low. Two recent scenarios have developed as the market continues to navigate the COVID-19 pandemic over the last several months:

  1. High demand for toilet paper and sanitary tissue/towel products resulted in empty shelves at many retailers in late spring and early summer; the supply chain is still lagging in some areas of the country.
    • Strong demand for primary and secondary chips, as well as pulpwood—the primary raw material inputs for pulp/paper manufacturers—has driven prices higher in some markets. In other markets, however, prices have trended down.
  2. North American lumber producers have seen surging demand for their products as the construction sector plays catch-up after the national lockdown. Forest2Market’s composite price for finished southern yellow pine lumber recently hit $928 per thousand board feet (MBF), which is 61% above the previous all-time high.
    • A steady supply of sawtimber across the South has kept log prices in check; this presents an ideal opportunity for producers to take advantage of competitively priced wood while maximizing profits.

Wood products manufacturers seeking a market advantage in either of these scenarios must increase capacity while controlling input costs, however the conventional wisdom to reduce holding costs by carrying less inventory may no longer apply. Holding an extra day’s inventory could turn out to be far less expensive than the spot purchases required to reinforce the wood yard when supply gets low. For this reason, budgeting wood raw material costs may be more directly tied to inventory management than ever before.

But how do you know exactly how many days of inventory to carry? Two tools can help you make this determination during the budgeting process:

  • A benchmark that will allow you to understand your facility's position in comparison to your peer group
  • A raw material price forecast

 

Learn more about SilvaStat360 and FisherSolve business intelligence platforms.

 

Knowing where you stand in the market compared to your peer group is essential during times of high raw material cost volatility. Custom forecasts from Forest2Market and Fisher International provide the most robust and accurate market data available. The following characteristics distinguish our forecasts from all other forecasts available on the market:

  • Data Quality and Quantity:
    • Forest2Market data is unique within the forest products industry, as it is the only comprehensive set of data that is collected at the transaction level. This transactional data, representing over 40 million wood raw material transactions per year, provides a full-spectrum view of market dynamics and includes information supplied by forest products companies, wood dealers, loggers, consultants and landowners.

    • Fisher International’s business intelligence system contains highly detailed and complete information on every pulp and paper mill in the world. It describes the assets, production, operations, environmental flows, costs-of-production, long-term viability, carbon footprint and more for all pulp and paper mills producing 50+ TPD.
  • Proprietary Modeling:
    • Forest2Market’s proprietary forecast models are built on relationships between macroeconomic indicators that affect demand (GDP, housing starts, etc.), local events that affect supply, and the supply/demand dynamics, including inventory levels, that have been statistically validated with our historical price databases. Large sets of very granular data allow us to find strong correlations, thereby reducing forecast deviation.

    • Fisher Forecasts are made possible by good data, industry understanding, and System Dynamics mathematical models. Our models work because they simulate the market’s key drivers and how they interact: supply, demand, price, inventories, order rates, shipments, imports, exports, market leadership, etc.
  • Precise Starting Prices:
    • For our clients who seek to understand their specific price positions in the wood raw materials supply chain, our forecast starting point is the current, actual weighted average market price of wood raw products—down to the county level—that includes the unique sales attributes and cost components associated with local markets.

Global market uncertainty is the highest it has been since the Great Recession that began over 12 years ago. To alleviate some of the pressures that have impacted your business over the last several months, you need a collection of business tools that enable you to make better decisions with a high degree of confidence. Forest2Market and Fisher forecasting products are designed to be the most relevant, data-intensive tools available to your management teams.

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