Dollar dumping begins at the micro level

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Subprime JD's picture
Subprime JD
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Dollar dumping begins at the micro level

For those who don't know, my family is in the restaurant business. We own several locations and deal with small to medium size distributors. Yesterday my brother went to a big coffee and chocolate products distributor and this is the jist of the conversation:

"Sugar prices are exploding higher. We are in the process of purchasing longer term contracts to hedge against these price increases. I also fear that gasoline prices will hit $5 soon. Basically we are going to be filling up inventories to the max. " - distributor

My uncle, who also is a major distributor has repeatedly told me that his vendors such as Heinz and Cargill have also jacked up their prices. His inventory levels are also at the max. At the same time he says that 1/3rd of his customers are either late or in arrears. Prices increase on the back end with customers getting squeezed in the front end. This will end with many small businesses closing down.

My dad, as small as a market participant that he is, is also filling up his inventories to the max. He's buying as much flour, rice, sugar and other dry products as he can before they shoot to the moon. I explained to him that he's dumping dollars in exchange for products. He's beginning to understand. 

Here's some small world examples from the wholesale side:

Oil shortening: from $19 to $33 a box

Ketchup: from $18 to $24

Ground beef: $1.50 to $2 per pound

Our overall COGS went from low 32% to high 38% sometimes dipping in the 40%.

 

 

BuzzTatom's picture
BuzzTatom
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Re: Dollar dumping begins at the micro level

I just paid property taxes on 2 buildings today. One's market value is $750,000 and I pay $18,000 in property taxes the other is a little over $800k and I pay $20,000. I don't own these building even though I have the titles, I am leasing them from the govt. The squeeze that is going on with inflation like you named above on food and inventories coupled with the increasing overburden that govt is putting on those that create jobs is reaching a level that has to pop at some point soon. I don't see how small businesses can continue to handle these stresses that society is putting on them. We think unemployment is bad now I think we have no idea how bad it is fixing to get. Timeframe? I don't know but this reaching a crescendo in my opinion.

 

 

 

Travlin's picture
Travlin
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Re: Dollar dumping begins at the micro level
bearmarkettrader wrote:

My dad, as small as a market participant that he is, is also filling up his inventories to the max. He's buying as much flour, rice, sugar and other dry products as he can before they shoot to the moon. I explained to him that he's dumping dollars in exchange for products. He's beginning to understand. 

Hi Bear

Thanks for the report.  I find information like this very helpful as it first anticipates and then confirms the "official" reports, and also supports Chris' predictions.  Is this business located in the Los Angeles area?

Travlin 

Poet's picture
Poet
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Re: Dollar dumping begins at the micro level

 

Thank you for sharing. I had been wanting to hear more of the nuts and bolts of what was going on at the small business/restaurant level - margins are smallest there as, despite what economists say about economies of scale, big corporations tend to siphon off those scale-based profits for CEO compensation and overhead instead.

What your uncle is doing makes total sense, like you said, dumping dollars for product. Doing his own form of hedging by buying in bulk and stocking up in anticipation of even higher prices. Even if it stays high, it may be longer time before he has to buy again, and by then other restaurants may have gone out of business and/or consumers may have gotten used to the idea of prices being higher.

Please keep sharing stuff like this.

Poet

Subprime JD's picture
Subprime JD
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Re: Dollar dumping begins at the micro level

Interesting thing is that many of these participants dont realize what they are doing. They understand it from a business sense but not from a monetary sense. I guess it doesnt matter if they understand the "what" only the "why" meaning prices are going up so I might as well buy the stuff.

Saffron's picture
Saffron
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Re: Dollar dumping begins at the micro level
BuzzTatom wrote:

 Timeframe? I don't know but this reaching a crescendo in my opinion.

Greatly agree with this. We just got a letter from a vendor warning that due to the increase in *cotton* prices, the cost of the finishes we buy is going up by 35 - 85% (depending on the color) on February 1st. Apparently cotton is used for white in the lighter finishes. They even warned that the increase is not going to quite cover their additional costs (I guess warning for another increase within a short time frame.)

We have the same dilemma as your father and uncle, BMT, except in our case what we need to stock up on isn't something that would feed us in the event business slowed. So tonight's conversation is probably going to center around just that ... do we place a huge order or not? What use will a giant inventory do us if clients can't afford to get their furniture refinished? Dh already keeps his prices as low as he can ... without the ability to pass the increase on to customers, we wonder how long we can do this?

Anyway ... y'all might want to consider stashing some extra t-shirts and underwear.

~s

PP Mazzini's picture
PP Mazzini
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Re: Dollar dumping begins at the micro level

To reiterate the earlier comments, this type of anecdotal evidence is quite valuable.  If anyone else has any evidence of price movements in their particular industry, I'm sure we would all be grateful if you shared...

Poet's picture
Poet
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Posts: 1892
Cotton To Lacquer
Saffron wrote:

We just got a letter from a vendor warning that due to the increase in *cotton* prices, the cost of the finishes we buy is going up by 35 - 85% (depending on the color) on February 1st. Apparently cotton is used for white in the lighter finishes. They even warned that the increase is not going to quite cover their additional costs (I guess warning for another increase within a short time frame.)

I was wondering what cotton had to do with finishes, but did some Google research and found pyroxylin is made from short-fiber cotton treated with sulfuric acid and nitric acid to become to nitrocellulose (gun cotton), which is then washed with water and some soda to remove the acid. Then the water is removed and alcohol added. The mixture is later processed further to a solid, fibrous material that is then treated with solvent liquids and other processes to eventually end up with make lacquer. (Source)

Kinda reminds me of that fascinating video wherein beautiful blonde Dutch artist and author Christien Meindertsma describes the 184 things (from paint to medical devices, to beer, wine, fruit juice, and toothpaste) made with pig by-products. (I wonder if Muslims are aware that it's smeared everywhere and on everything...)

Poet

xraymike79's picture
xraymike79
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Posts: 2040
Re: Dollar dumping begins at the micro level

A UK businessman's perspective from today:

Almost every business (and most people) has to pay for borrowing money, for financial services, day-to-day cash flow, credit, overdrafts, leasing, mortgages etc. Therefore rasing interest rates introduces further costs on business which either leaves them with less to spend or forces them to increase prices to their customers.

Because most businesses operate a just-in-time practise the recession and inflation has already reduced the cash reserves and cash-flow for a lot of businesses therefore with the further pressure of higher interest rates the more likely, in some cases the only, choice is to raise prices.

Energy costs are already an enormous cost, much bigger than most people realise. For example, recently I was drawing up a business plan for a purchase of a new (powerful and expensive) computer for my business and whilst calculating the running costs I found that if electricity prices remain as they are (they don't rise) over the expected working life of the computer then the the energy costs will be equal to or exceed the capital costs. Put simply it will cost more to run the computer than actually buy it! And that is in the unlikely scenario where energy prices remain static, which they won't they'll only rise.

Add to that the extra costs of higher interest rates (rates for financing such purchases, in reality, never really dropped below ~8% (3.5% if you're very lucky!)) and you have two significant inflationary pressures.

And since the root cause of inflation is, currently, outside the effect "envelope" of any UK interest rate rise and is increasing the price of essential/critical goods then any rate rise will be pointless as it will have no effect on reducing inflation. (And I fear it'll only put people out of business reducing competition and numbers - again a potential inflationary pressure)

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