United States

Middle market companies yet to embrace hedging, despite mounting costs

INSIGHT ARTICLE  | 

Despite mounting cost pressures on their supply chains, just a fraction of middle market companies appear to be hedging commodity prices for the longer term, recent RSM research shows.

Nearly 70 percent of executives surveyed in the proprietary RSM US Middle Market Business Index survey said they paid more for goods and services in the fourth quarter, up from 59 percent in the most recent period. Yet only 14 percent of that cohort said they are instituting hedging strategies for steel, aluminum, lumber and other essential inputs in their supply chains.

“This is a worrisome indicator that the middle market may not yet be accepting the likelihood inflationary pressure will continue to build in 2019,” said RSM US Chief Economist Joseph Brusuelas. “We fully expect the Federal Reserve to continue additional rate hikes in 2019 that will likely lead to steeper pricing for commodities and tighter margins for medium size businesses, and signal a move into restrictive monetary policy.”

Adding to the pressure on inputs, Brusuelas says, have been moves by the current administration to institute tariffs on a range of imported goods, primarily from China, the United States’ largest trading partner.

In June, the administration instituted its first round of steep tariffs on imported steel and aluminum, marking the opening salvo in an ongoing trade dispute that has led to subsequent duties on a long list of imported goods. In early December, the administration agree not to impose additional increases on existing tariffs scheduled for Jan. 1, pending further negotiation.

After rising nearly 40 percent in the first half of the year, the cost of benchmark hot rolled steel has risen more than 12 percent since the start of 2018, ending at $747 per ton as of Dec. 17.  Meanwhile, aluminum prices are down by about 15 percent in the same time period.

Coping strategies for middle market businesses

Executives at middle market companies said they are deploying a host of strategies to cope with their rising costs: top among them was increasing their companies’ focus on maintaining profit margins (62 percent); and investing to increase efficiencies and productivity (59 percent).

Industries ranging from automakers to housing have been registering the effects of higher input costs. General Motors said in November it planned to shutter five plants in the United States and Canada and lay off 14,000 workers, beginning in June.

Meanwhile, labor costs are also pressuring the bottom line. As unemployment continues to track at record lows below 4 percent, midsize companies struggle to find qualified workers and have been forced to boost wages. Nearly 60 percent of executives polled in the MMBI said they expected to pay higher labor costs over the next six months.

These rising cost pressures add up to uncertainty heading into 2019, with only slightly more than half of executives polled by RSM expecting the economy to improve over the next six months; that’s down sharply from 73 percent who registered optimism in the first quarter.

Said one survey respondent of rising costs: “This has been one of our biggest areas of concern. Raw material goods such as lumber, steel and other (items) have risen dramatically, and access to certain products is more limited.”


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