By Francisco Mateo, CPP, CFE
A commodity is a product that, regardless of where it is produced, is influenced by supply and demand. Future contracts reflect “worldwide consumption” measured by international import and export patterns, as well as domestic consumption environments. Ironically our current recession has been marked by the lowest consumption levels seen in decades, but commodity prices remain volatile and poised to rise. It’s important to reflect on these conditions since crime-driven asset loss trends did not begin with the economic decline, but they have been exacerbated by it. The security practitioner needs to establish more sophisticated and innovative approaches to loss trend prediction in the marketplace. One such method is the correlation between commodity prices and losses due to illegal activities at many companies within diverse industries. A full life cycle approach would allow the security practitioner an early warning system, as well as a timely and actionable process to loss risk management.
History gives us an important frame of reference on this subject. In the 1970’s, shortages of many consumer products were wide-spread, resulting in increased criminal activities, such as truck hijackings. Then inflation wreaked havoc on consumers spending, constraining their buying habits. As a consequence a budding market for stolen product flourished as more people elected to acquire everything from electronic appliances to foodstuff through these informal and illegal markets. The demand was high and organized criminal gangs handled the supply; to the detriment of companies of all sizes. The security practitioner can obtain unique insights by focusing on commodity futures that impact their respective businesses. I will highlight three broad commodity sectors here.
The ebb and flow of fresh milk prices is contingent upon overall demand. During a recession even a slight increase in milk prices would exclude a considerable portion of consumers. Sensing this opportunity the truck hijacking gangs would prefer to target milk products, both for their high price as well as the rapid turn-over potential. Otherwise loyal consumers are likely to purchase the stolen product from informal markets, which translate into lost sales opportunity and lost market share for food companies. Having established this link we realized that the earliest trigger for our truck hijacking prevention plan was at the point when commodity prices for fresh milk had an upward trend and changes in supply patterns (like rising cost of land in New Zealand or drought in Australia), as well as social-political issues (drug cartels in Mexico that hedge lost business in the drug trade due to government pressure, by engaging in truck hijackings) have a significant impact. Armed with this information our enhanced risk management for milk product transport can be activated throughout the food company’s supply chain.
Copper: Since 2003, the price of building materials began a steady climb fed by a buoyant housing and commercial real estate market. The price of base metals like copper and steel responded in kind with the former increasing approximately 500 percent from 2001 to 2008. The record high prices led to a disturbing trend in “copper theft”, which according to the U.S. Department of Energy, in its different forms has affected construction sites, vacant buildings, communications towers, production plants, electrical substations, foreclosed properties and others. The epidemic has left approximately $1 billion in annual losses in its wake. Even worst is the apparent bourgeoning black market in stolen copper sold to recyclers. As it turns out, it has been these illegal recyclers and commercial scrap dealers who have opened the flood gates, providing an easy fencing operation and acting as intermediaries to organized rings that assemble and ship large quantities of the metal for industrial clients in China and India.
As often happens, criminals have been better adept at sensing market trends, especially in high-profit yielding schemes. Unfortunately for most security practitioners, the way we become aware of such trends is when our companies have been victimized. Although hindsight is 20/20 and Monday morning quarterbacking won’t give us a solution, if we had been aware of the commodity price fluctuations for copper, it would’ve been possible to see the developing trend. The copper theft problem is expected to continue as commodity price for the base metal continues to rise on reports that China is stockpiling it.
The early theft statistics could’ve served as confirmation. Here too the early alert system concept would apply. Armed with predictive data, we can efficiently allocate our risk mitigation resources. We are sure to be one step ahead of the thieves by putting in place priorities based on at-risk assets. I must add that solution to this widespread problem appears to be expedited through public-private partnerships with our law enforcement brethren.
Companies from oil refineries to retailers know that the threat of fuel theft is a problem that requires large investments to detect and deter. Rising fuel prices in recent history has resulted in a series of fuel theft schemes burdening businesses with serious losses worldwide. The trend is expected to continue overtime as worldwide demand for oil continues to expand while supply is poised to shrink. Oil commodity prices tend to be a leading indicator of trends in the global economy due to our dependence on the fossil fuel for much of our economic activity. The ubiquity of fuel makes it very attractive to thieves as it can be stolen and sold with ease. The weakest link in the fuel supply chain is on its route to market, consequently any countermeasures should make transportation a focal point. Based on history, we know the motivation to steal fuel is more acute when prices rise sharply. As a result we see with increasing regularity hard-pressed haulers and even passenger car drivers forced to seek alternative illegal fuel sources to stay in business. We should also consider that fuel theft is easily accomplished; hence it is preferred by clever organized rings, always looking beyond the obvious.
The trend is not likely to change any time soon as there are no viable alternatives to oil yet; thus we can build our models based on the price fluctuations of gas and diesel fuels. Investing security dollars protecting depots is not enough anymore, our contingency plans should be designed in a way that would trigger our prevention and detection measures prior to any significant changes in fuel market prices. Like the base metal problem, at the heart of the matter is the thieves’ ability to fence stolen fuel via illegal distributors connected to organized crime rings.
The concept I’ll proposed is simple in its strategy. But first some key facts about the way commodity futures are traded. A futures contract is an agreement to buy or sell an asset at a specific price at a later date. Futures often expire monthly, but pricing information can be formulated and tracked on a daily, weekly or monthly basis. Besides supply and demand there are many forces causing fluctuations in commodity prices. That is why we need to build and maintain an inventory of possible scenarios.
I track the Softs commodities (Foodstuffs) sector on a weekly basis to determine how the rise and fall of milk, sugar, coffee, cocoa, corn, wheat and others would correlate to consumer prices. Any significant jump in the price index or its weighting according to the Consumer Price Index (CPI), would confirm if the commodity price increase is fundamentally sound. All Index information is open source and readily accessible.
Armed with information, I would look inward to my organization to determine what if any assets, brand or products within that category would be most at risk if the price continued to rise. If the risk analysis pointed to an opportunity for mitigation, I would put in place the needed countermeasures.
Companies can’t stop simply at product protection on its route-to-market, but must look beyond. In the food sector, for instance, the expired product handling and disposal practices open many loopholes in a down economy. We must consider that consumers purchasing products at thrift markets would be less willing to follow the indicated expiration date. Although the risky behavior is the consumer’s responsibility, it can have negative effects on the brand. One sick consumer can increase the potential for reputation loss, regardless of the conditions. At the extreme level, companies should also prepare to manage loss control during severe shortages, which may trigger food riots and cause severe business disruption. Political balance in many countries around the world depends on availability and affordability of mass consumer products. Who can forget the violent riots sparked by the food shortage crisis that first reared its ugly head in late 2007. Security practitioners can achieve this level of insight by charting foodstuff commodity prices in conjunction with the inventory of scenarios that could impact the consumer prices. The bottom line is that we can develop our own risk matrix to arrive at actionable loss prevention data.
Security practitioners need an early warning system to alert when the tide of loss trends begins to turn. The earliest we know about losses or potential losses of product or brand reputation, the better prepared we will be. As asset protection requires resource allocation, we need to be in tune with the root-causes of the loss events. Whether your company is in the energy, metal or food sectors, monitoring commodity prices will ensure the gathering of predictive information, which is actionable and allows Security Practitioners to create or improve their asset protection program.