Rising Input Costs Are a Contract Problem Before They Are a Pricing Problem

The gap between what manufacturers pay and what they can charge is the widest it has been in four years.

Producer prices for processed goods used as manufacturing inputs rose 14.1% over the twelve months ended in September — the largest increase since August 2022. Unprocessed intermediate goods rose 21.5%, the largest since September of that year.

Over the same period, producer prices for final demand rose 6.3%.

Inputs are rising at more than twice the rate of output prices. That spread is margin compression, and it is arriving in a market where demand is sound. The September ISM manufacturing index read 54.5, with new orders at 55.3 and employment at 52.7, all in expansion. The prices index read 77.9, up from 71.1 in August and the second-highest reading of the year.

This is not a demand problem. It is a cost problem arriving during a reasonable year.

One Shock, Many Different Effects

Most of it traces to a single event.

The closure of the Strait of Hormuz, which began in late February, has cut transits to roughly five vessels a day against a pre-closure average near 100 — a decline of about 95%. Gulf crude exports have fallen 47%, from roughly 17 million barrels a day in 2025 to about 9 million. Brent peaked above $130 in April and has since held roughly 20% above pre-closure levels.³

Before the closure the strait carried 38% of global seaborne crude, 29% of liquefied petroleum gas and 19% of LNG. It also handles close to a quarter of the world’s urea exports.

A disruption of that size moves energy, petrochemicals, resins, industrial gases and fertilizer at the same time.

It did not move them in the same direction, and it did not move them for the same length of time.

Same Shock, Opposite Outcomes

Fertilizer makes the point precisely.

Urea climbed above $850 per metric ton in April, an 80% increase in two months and its highest level since 2022. In its April outlook the World Bank projected urea would finish 2026 nearly 60% higher and the broader fertilizer index more than 30% higher.¹

By August, urea had fallen to $390 per metric ton — below its 2025 average of $423.²

Diammonium phosphate did the opposite. Forecast to rise about 6%, it averaged $685 per metric ton in 2025, $760 in the second quarter of 2026, and reached $794 by August. It has not come back down.²

Two fertilizer inputs, one regional disruption, opposite results inside six months. The aggregate index tells the same story about forecasting: it peaked at 188 in the second quarter and stood at 146 by August, leaving the 30% annual projection unlikely to hold.²

A buyer who locked in long on urea near the April peak is now paying roughly double the spot price. A buyer who stayed on index for DAP absorbed the entire increase. Both decisions were defensible on the information available at the time. Only one worked in each case, and which one was largely a matter of timing.

That is the problem worth solving. The companies that came through this well were generally not the ones that forecast correctly. They were the ones whose contracts did not require them to forecast at all.

Contract Terms Decided the Outcome

Raw material agreements are often treated as procurement documents and reviewed for price, volume and delivery. In a volatile input market they function as financial instruments, and a handful of terms determine how much volatility reaches earnings.

Duration and the fixed-versus-index decision are the obvious ones, and they are rarely all-or-nothing. A portion fixed and a portion indexed produces a materially different outcome than either extreme, and it is the structure that most protects a company from being badly wrong in one direction.

Price re-opener and renegotiation triggers matter more than their length in the document suggests. An agreement that reopens on a defined index movement gives both parties a mechanism short of breach, which is precisely what the urea reversal left some buyers without.

Pass-through provisions on the customer side deserve the same scrutiny as supply terms. A manufacturer holding fixed-price customer commitments against indexed input costs has written an uncovered position, and most companies in that posture did not intend to.

Force majeure language drafted for weather and labor disputes frequently does not reach a chokepoint closure or a sanctions regime. Whether that language has been read since February is a reasonable question for any company with Gulf-linked inputs.

Diversification Is Insurance, and Insurance Has a Premium

The case for broadening the supplier base is straightforward after a year like this one. It should still be made honestly.

A second qualified supplier usually costs more per unit than the first. Dual sourcing fragments volume and weakens negotiating leverage. Qualifying an alternate source consumes engineering and quality resources that have other uses. These are real costs, paid every year, against a risk that does not arrive every year.

That is an insurance decision and should be underwritten like one — sized to the exposure rather than adopted as a general principle. The question is not whether to diversify but which inputs would actually halt production or breach a customer commitment if a supplier failed, and what an interruption in those specific inputs would cost.

Geographic concentration is the exposure most often missed, because it usually sits a tier or two upstream. A company with three suppliers of a given input has diversified nothing if all three source from the same region.

Exposure You Cannot See

None of this is actionable without knowing where a company actually stands.

In a benchmarking survey of 456 manufacturing facilities this summer, raw material price volatility was the single largest driver of rising operating costs, cited by 26% of respondents, ahead of labor at 21%. Knowing that at the company level is of limited use. Acting on it requires margin by product, by customer and by contract — which inputs are exposed, under what terms, expiring when, and which customer commitments sit opposite them.

Many middle-market manufacturers cannot assemble that view quickly, and the capability gap tracks with size. Roughly 12% of manufacturers report using artificial intelligence in business functions; among firms with more than 250 employees the figure is about 30%, against 17% for firms under 20.

The point is not that software solves an input cost problem. It does not. But repricing, product mix, substitution and renegotiation are the decisions that matter at these levels, and none of them can be made well by a company that cannot see which products and customers remain profitable.

What Management Teams Should Be Able to Answer

• Which inputs carry the most exposure, measured as cost multiplied by price volatility rather than cost alone?
• What share of input cost is fixed, indexed or spot today, and when does each major agreement expire or reset?
• Where are fixed-price customer commitments sitting opposite indexed or spot input costs?
• Which single supplier failures would halt production or breach a customer contract, and what would that interruption cost?
• What happens to covenant headroom and liquidity if current input levels persist for another four quarters?

The Point

Input costs will come down on some lines and stay elevated on others, as they already have. Forecasting which is which has not been a reliable strategy this year, and the April projections are themselves evidence of that.

What companies can control is how much of that movement is allowed to reach earnings. That is set in contract structure, in supplier concentration, and in whether management can see the exposure clearly enough to act while there is still time to act.

The manufacturers that handled 2026 well were rarely the ones with the best view of commodity markets. They were the ones who had arranged, in advance, not to need one.

Where Perrin & Co. Can Help

Perrin & Co. provides capital structure, financial and operational advisory services to privately held middle-market companies.

On input cost exposure, that typically means modeling margin by product, customer and contract; reviewing supply agreements for duration, indexation, pass-through and re-opener terms; quantifying supplier and geographic concentration against what an interruption would actually cost; and testing covenant headroom and liquidity under sustained input cost scenarios.

We work alongside counsel, procurement and operating teams, and lenders. Our role is focused on the financial analysis, exposure measurement and capital structure considerations surrounding these decisions.

Notes

1. Forecasts are from the World Bank Commodity Markets Outlook, April 2026, and reflect conditions as of that date.
2. Prices are from World Bank Commodity Price Data (Pink Sheet), September 2026 edition; urea is the Eastern Europe quotation. The series is published monthly in arrears and ends with August 2026. No September fertilizer prices were available at the time of writing, and quoted figures are annual, quarterly or monthly averages rather than transaction prices.
3. Shipping and export figures are drawn from commercial shipping-data providers as reported in August 2026, not from an official agency release.

Sources: U.S. Bureau of Labor Statistics, Producer Price Indexes, September 2026; Institute for Supply Management, Manufacturing ISM Report on Business, September 2026; World Bank, Commodity Markets Outlook, April 2026, and Commodity Price Data (Pink Sheet), September 2026; UNCTAD, pre-closure chokepoint volumes; Wipfli, Manufacturing Benchmarking Survey, July 2026; U.S. Census Bureau, Business Trends and Outlook Survey, April 2026.