Questions to Ask Beyond Labor Costs: Did Commodity Volatility Drive Hostess Into Bankruptcy?

Our sister site MetalMiner recently did a bit of research on Twinkies -- but not the type that require a workout to burn off. Specifically, MetalMiner took a look the questions to ask in evaluating how commodity prices and related costs may have played a role in the ultimate demise of Hostess. It does not take a rocket scientist to consider the volatility we've seen with ingredient prices in the past twenty-four months. Sugar, wheat, corn -- you name it. Just as the costs of Midwestern farmland have gone through the roof, so have the commodities that you can plant in the fertile soil of the nation's bread belt. At Hostess, challenges extended far beyond just labor, and we strongly suspect that commodity management and procurement were not helping the cause, at least not at the level they needed to.

From a procurement perspective, Hostess has not made any of our sophistication/segmentation lists of companies in the food and CPG sector from a procurement and supply chain perspective, so we're flying a bit blind in understanding the programs they had deployed internally relative to others in the food and baking industry. In evaluating a situation like Hostess -- or more broadly speaking, general procurement and finance organization sophistication when it comes to actively managing commodity pricing -- there are three basic questions that MetalMiner recommends asking to surmise the capabilities of a company:

1. Does the company make use of a hedging strategy? (Formal or informal?) By formal, we mean actual use of futures contracts on exchanges e.g. wheat, sugar, butter, fuel or informal contracts such as off-take agreements or annual contracts.
2. Does the company regularly engage in purchase price benchmarking both with others in the industry as well as key industry suppliers?
3. Does the company build forecasting and predictive models for key raw material inputs and then develop strategies to mitigate price risk?

Care to wager a bet on Hostess? As shareholders ultimately perform an autopsy of this high-caloric bankruptcy specimen, we suspect answers to these questions (in the negative) will come out playing as important a role as blaming labor costs.

- Jason Busch