Dealers in commodities, or in parts that use a significant amount of a commodity with large price fluctuations, have significant business challenges. In previous articles I’ve written about the nature and impacts of commodity price volatility:

Commodity Prices: Basics for Businesses That Buy, Sell or Use Basic Materials

Commodities Prices: Why Do They Shoot Up And Then Collapse?

Commodity Price Volatility: What Should Producers Do About It?

Commodity Price Volatility: What Should Users Do?

This article will cover the two challenges of dealers: pricing and working capital.

The owner of a gas station has the same pricing challenge as a copper and brass distributor or a cocoa wholesaler: how to set selling prices when your buying prices change frequently. To understand the right way to set prices, it’s easiest to understand the wrong way: pricing based on historic cost. Let’s say that the gas station owner marks up the price of gas by 50 cents, so when he buys for $3.50, he sells for $4.00.  Suppose a crisis in the Middle East pushes wholesale prices up to $3.75, but he still has gas in his storage tanks that cost him $3.50. What happens if he leaves his retail price at $4.00? Customers buy from him rather than from his competitors. He gets more sales, but at a thin profit margin when measured against the cost of refilling his tanks.

The second challenge that dealers face is changing working capital needs as prices fluctuate. Let’s say that you sell zinc to galvanizers across the country. You have adequate working capital to buy zinc from producers and sell it to galvanizers. Now the price of zinc doubles. You may still be moving as many pounds of zinc as ever before, but you’ll need twice as much working capital. You’ll tell your bank that your business has not really increased, at least not in terms of volumes and profits, but you need a larger line of credit so that you can buy at the higher wholesale prices.

Large price swings will trigger almost equally large swings in working capital needs. This isn’t all bad, as it’s a barrier to entry for new dealers trying to go into competition with you.  If you’re not prepared for the increased working capital—as well as for having idle funds when prices are low—then you cannot run your business as you see best.