Commodity inflation has been challenging enough over the past year, but supply chain issues have multiplied the increase through higher direct costs as well as premiums associated with receiving the product on time. Sourcing U.S.-produced goods may help to soften the impact, but even domestic trucking can be difficult to find.
Throw in Category 4 Hurricane Ida landing near New Orleans—a huge gateway for imported goods from around the world and a key port for U.S. agricultural exports as well—and the situation appears only to be getting worse. The storm damage was widespread, including flooding in the key markets of New York and New Jersey. On the West Coast, fires have disrupted rail freight shipments to and from port. Whenever disaster strikes, FEMA is ready to respond as needed, which is vital for bringing relief but complicates regular supply chains as drivers and equipment are diverted to assist.
Suppliers are always trying to stay one step ahead of such issues to provide reliable service and meet customer expectations, and one strategy has been to lengthen lead times for orders. Food and beverage companies have had to navigate increasing and varying lead times for ingredient orders, which has led to further supply chain issues as some companies increase raw material inventories in hopes of not running out of supply and potentially shutting down their plants.
The increased demand and stockpiling, along with a reduced labor force because of the continuing COVID-19 pandemic, continue to put available supply chain resources in high demand. The Global Containers and Packaging Price Return Index was averaging around 225 over the past five years but has jumped to above 310 over the past few months, a 38 percent increase. Many ports have ships lined up for many as ten days waiting to be unloaded. The twin ports of Long Beach and Los Angeles were reported to have 44 container ships awaiting to be unloaded in late August. As shown in the chart, the number of containers handled at LA and Long Beach show what is happening around the U.S.: record volume!
Monthly containers handled at the ports of Los Angeles & Long Beach
Source: Port of Los Angeles, Port of Long Beach
Increased trade volume and lack of available transport equipment are resulting in further product price increases. Even the specialized bulk shipping industry is not immune to the shipping constraints. The Baltic Dry Index, a benchmark for ocean freight, has been skyrocketing as well: After averaging a little over $1,000 over the past decade, the index is now over $4,000. On a more local level, even bulk liquid and dry trucking companies are seeing pricing pressure as hiring and keeping drivers is more difficult under COVID-19. As a result, pricing for 2022 appears to be heading for 10 to 15 percent increases.
Food and beverage manufacturers are trying desperately to keep their retail partners satisfied in order to maintain market share. We all know if you don’t take care of your customer, someone else likely will. As the U.S. freight transport sector strains under higher utilization, companies have few options other than pay higher prices to secure their spot in the supply chain.
High costs usually help solve industry problems by attracting more investment and resources. However, given the global pandemic and labor shortage in the U.S., it is difficult to determine the catalyst for investment. In past years of supply chain congestion, there was still a rhythm to demand, such as the holiday season rush, but COVID’s impact on the flow of domestic and international goods is proving to be long-lasting and outweighs usual patterns. Do freight companies spend to meet the current situation, investing in training a larger crew and buying vehicles and containers, only to be left with excess capacity if demand goes back to “normal”? And will planning for far-reaching natural disasters become part of the supply chain landscape, for instance adding a premium to goods needed during hurricane season?
The variables at play are numerous and constantly changing, making it nearly impossible to predict when and if we could see the supply chain return to normalcy. Is normalcy even possible in this environment? Higher prices usually attract investment quickly, but only when the labor and resources are available, which leads us to believe our current supply chain challenges could persist for many months if not through 2022. Even then, costs and efficiency are likely to establish a new, less friendly normal.