by Phil Baratz
Though usually not at a loss for words, what has happened in the past week defies logic and almost defies reality – except that it actually happened. We know the impetus – almost entirely the Russian invasion of Ukraine, along with “supporting actors” of Iranian nuclear talks, supply chain disruptions, interest-rate movements, and several “political climates”. We heard the word “unprecedented” more times than we would like to remember, starting two years ago this month as the pandemic took hold. This is, for us, “unprecedented-plus”, and navigating all of this is of unprecedented importance. If there were ever a time to reassess pricing, hedging, inventory management, delivery planning, and asset (trucks and people) utilization…now is the time to do so.
By the numbers:
The prices of 03/08/2022 change and range for ULSD were the most since trading started, decades ago. The daily price change and the daily range (51 cents and 62 cents, respectively) exceeded the AVERAGE 30-day, 60-day and 90-day ranges since 2000. The one day range was 2/3rds of the average ANNUAL range – which is ~91 cents per gallon. Also, it should be noted that none of the numbers above include the fact that last nights’ trading reached a level that was another 23 cents higher ($4.67/gallon).
Man Plans and God Laughs.
Budgeting season has been completed by most dealers, but this shock will reverberate through the industry for a while (no one, except for one person in the Kremlin, knows for how long). You still need to pay your suppliers in a much shorter time than your customers pay you in. You are still at the time of year the leads to the largest time-gap between deliveries (on average your delivery after March will be in August). Your working capital (receivables) lines and supplier credit lines are in dollar denominations, not in gallon denominations. Our finance team at Angus Advisory and Finance (AAF) has been working closely with our clients, their banks and their suppliers to work their way through these trying times. Sometimes a conversation can lead to better understanding, comfort and hopefully a workable strategic plan. If you think that such a conversation would be beneficial, please reach out to Jeff Simpson or Rashaan Baskerville – or your Angus Rep.
Pricing and customer retention
Since 1991 we have had no idea where prices are heading, neither in the next hour nor the next year. There are always those who claim to have a crystal ball and who are sometimes pretty good at guessing. We, however, believe that the only accurate way to look at prices is in the rearview mirror and that our clients should conduct themselves accordingly. HOPE that prices will fall and PROTECT against prices going up – that is our mantra and should be yours.
If you have offered a program for this winter, as have most of our clients, your customers need to be reminded about how much money they saved by being on your program. With retail prices reaching up towards $6.00/gallon in some areas, a reminder of “what you HAVE done for them lately” should carry some weight – especially as they are approaching $5.00/gallon to fill up their cars.
Customers want comfort and predictability. If you don’t offer a pricing program, there is a far greater likelihood than in years past that they will look around for a dealer who DOES offer a program. If you offer a fixed price, you really need to assess whether you want to do that – if you do, PLEASE get pre-paid, as customers will only look at you in the event that they end up paying $3.00/gallon more than their neighbors if prices fall (despite all of your communications with them about “fixed means fixed”). Capped prices – if hedged properly – will not be inexpensive. However, not hedging properly (and we can certainly tell you some stories from this winter…) can take decades of success and ruin it all because of one uncontrollable madman. This is NOT the time to speculate. As to how you should offer and hedge your price cap, we have a number of ideas – interestingly, a market in severe “backwardation” has some unique benefits towards marketing, and the related hedges. You MUST take a breath and you should talk to someone with a broader view than simply repeating what you have done in the past.
There is nothing more important to your business than how you act over the next 90 days. Sales, marketing, finance, accounting, operations and logistics must be integrated and planned together – not just someone in charge of hedging and someone else in charge of installs. You MUST operate an efficient business – with efficiency running the gamut from delivery optimization all the way through proper pricing programs and credit lines.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware that you could lose all or substantially all of your investment and may be liable for amounts well above your initial investment.