A fall in the price of a raw material reaches the margin late
11 October 2026, 09:46
On 9 October the United States Department of Agriculture raised its estimate of the American maize harvest by almost six million tonnes. On the Chicago exchange the price of maize for December delivery closed at just under $4.80 per bushel (about 25.4 kilos), 20.5 cents lower in a single day, about 4 per cent.
For those in Italy who buy maize, from feed mills to livestock farms, this could mean cheaper purchases. If it does, the saving will reach the accounts with a delay that depends on how much stock is already in the warehouse, as with any raw material.
In the accounts a raw material enters at the price it was bought at
Cost of goods sold includes the cost of the raw materials, packaging or goods used for what has been sold. The part that depends on a single raw material is its consumption. For a month it is calculated like this: stock on the first day, plus purchases, minus stock on the last day.
As a rule, stock is not valued at today's price but at the prices at which the goods were bought, using one of the methods allowed by article 2426 of the Italian Civil Code. With FIFO (First In, First Out) the goods that came in first go out first, at their own price. With weighted average cost each load consumed is valued at the average of the prices paid, weighted by quantity. With LIFO (Last In, First Out) the most recent purchases go out first: the fall reaches the accounts with the very first loads bought at the new price, while the stock remains valued at the old prices.
If a feed mill that uses FIFO has silos full of maize paid for in September, what it consumes over the coming weeks brings September prices into the accounts. The saving starts with the loads bought from now on. If the company has already signed fixed-price contracts, the loads covered by those contracts arrive at the old price, and the saving starts with the first load bought after them.
The same happens with a car. If the price of petrol falls this morning, the tank filled yesterday does not cost a penny less. The saving starts with the next fill-up: whoever was running on empty sees it straight away, whoever filled up yesterday must first use that tank.
The delay depends on days of stock
An order of magnitude for the wait is given by days of cover: today's stock divided by how much is consumed on average in a day. Across the whole warehouse and over the year, DIO (Days Inventory Outstanding) is used, the average number of days goods are held: average inventory divided by the year's cost of goods sold, times 360.
With 90 days of cover and FIFO, if consumption stays at its average level, for three months only goods paid for at the old prices reach the accounts; from the fourth month the goods bought at the new prices come in. With weighted average cost the fall starts to count from the first new purchase, a little at a time: with regular purchases, in the third month the cost of consumption has fallen by just over half of the price drop.
A month's margin is affected by the prices at which the warehouse was filled
The typical mistake is to read a month's gross margin, that is revenue minus cost of goods sold, as if it only showed how the company produces and sells. If price lists follow the raw material, a company with a full warehouse sees its margin widen when the raw material rises and narrow when it falls, because it sells at the new price lists products made with goods paid for at the old prices.
The second mistake is deciding on a discount without looking at the warehouse: a customer asks for one because maize has fallen on the exchange. A company with three months of stock that grants it straight away sells, for all that time, products made with maize that did not cost it any less. It may be the right choice, not least because a competitor buying maize today can give the same discount without losing margin. But it should be taken knowing how many days of that stock remain, what price was paid for it and what price it would cost to buy again today.
Reading the margin requires stock figures for every month
The value of the warehouse at the beginning and end of each month is needed. Without closing stock, consumption is inflated by everything left over; without opening stock, it is too low. Where inventory records are not updated in quantity and value and stock is counted only at year end, the margin for the months in between is an estimate.
Then the value of the month's consumption can be recalculated at today's purchase prices. The difference from the figure recorded in the accounts is the part of the margin that comes from the prices at which the warehouse was filled.
This article was prompted by a news item published in DTN on 9 October 2026.