Americans got a crash course in the realities of the modern food supply chain in the spring of 2020, when Covid-related disruptions left grocery store shelves empty and shoppers scrambling to find the products they needed to feed their families. While that was an extreme case, the global supply chain has only become more fractured in the years since, thanks to rising costs, shifting ingredient availability and changes in global consumer demand.
The primary culprit? Shipping.
Overseas freight costs have undergone drastic price increases in recent years due to fuel cost volatility and increasing demand for off-shore resources. What was once a way for North American companies to even out seasonal supply differences and save money has now become a new source of unpredictability across the food and beverage industries. Now producers are struggling to get the ingredients they need and, even when they can, are paying more for them.
Case in point: From January 2021 to March 2022, container shipping costs from East Asia to the U.S. West Coast, a common industry measure of overall market pricing trends, increased 180%. And no one knows when, or if, these costs will ever normalize.
No doubt, energy prices have a lot to do with this uncertainty. The fuel market was already volatile before Russia invaded Ukraine, with tightening supplies and rising demand creating uncertainty around the world. The fact that oil costs have more than doubled since the start of 2021 simply highlights this volatility.
But food producers need stable ingredient markets in order to produce cost efficient end products. They need to not only be able to source the raw materials they need at a price that makes sense, but also have confidence that they will be able to maintain that supply over time so that they can make long-term decisions. Right now that is all but impossible.
Consider what has been happening in the major ingredient markets so far in 2022.
Sunflower oil prices have increased 15% since January 2021 and many suppliers are no longer accepting new accounts due to difficulty in sourcing the raw materials. (Not helped by the fact that roughly 80% of the global sunflower oil supply comes from Eastern Europe, including Ukraine and Russia.)
The price of unprocessed rice, a barometer of the overall grain market, is up 29% in the last 18 months.
And pea protein, commonly used in plant-based protein products, now costs 30% more than it did at the start of last year.
That’s the problem as it stands today.
Uncertain raw ingredient supply chains lead to unpredictability in production volumes, cost forecasting and more, and relying on off-shore suppliers simply ensures more of the same. Overseas freight costs will rise, supplies will remain unpredictable, and rising fuel costs will eventually bump up overland trucking prices from ports to production facilities. It increasingly important for the CPG industry to find and secure safe and reliable ingredient sources both in the U.S. and abroad.
Right now the U.S. produces 381M metric tonnes of corn, 44.6M metric tonnes of wheat and 121M metric tonnes of soybeans every year, not to mention the massive supplies of rice, sorghum and sugar that America’s farmers deliver annually. Canada, Mexico and other nearby countries, though smaller, can contribute as well. It may not be enough to supply everything the CPG industry needs to keep up with demand, but these domestic and regional sources could go a long way toward helping alleviate the industry’s reliance on an off-shore supply chain that’s expensive, unreliable and getting more challenging by the day.