You aren't wrong if you've noticed that food prices are skyrocketing along with everything else. Because global supply chains tend to be interconnected, when one price goes up, others tend to follow. Back when traveling and shipping something was simple, price hikes weren't a concern. Of course, things have changed.
Anyone who has purchased food lately or is in this business knows that food price inflation has become a real issue. While we aren't likely to go hungry anytime soon, inflation is a concern from a business and customer experience perspective. Here's just how much those prices have soared, some of the ways food supply chain issues are contributing to inflation, and what supply chain leaders can do to address the problem.
How Serious is Food Price Inflation?
Food prices have increased by unprecedented levels over the past year. According to the Congressional Research Service, The U.S. Consumer Price Index (CPI) for food increased 9.4% between April 2021 and April 2022. The price of all goods has risen over the same period by just over 6%, but not as much as the price of food.
When broken down even further, some of the figures are staggering. Food purchased for home consumption has increased in price by 10.8% year-over-year. And certain items, like eggs, have increased in price by over 22%. Meat has also become costly, with price increases for poultry and beef coming in at 15.3% and 14.3%, respectively.
How Food Supply Chain Issues Are Contribution to Inflation
Where are these price increases coming from? Of course, producers set prices to create a reasonable profit after covering their costs. This raises the question as to which input costs have gone up. Unfortunately, this is a complex issue because the food supply chain has been so incredibly disrupted over the past several years. But here are some of the ways the food supply chain is impacting inflation.
Labor Costs
Even though the unemployment rate has dropped sharply, labor costs have been an important factor in inflation. There are still fewer people working than before the COVID-19 pandemic because some workers chose to retire early and there has been reduced immigration.
Businesses throughout the food supply chain, whether it be in agriculture, processing, or distribution, have struggled with recruiting. This drives up wages in those sectors and can lead to higher prices for products.
Energy Costs
The recent increase in energy costs shouldn't come as a surprise. While oil and gas prices fell at the start of the pandemic, they surged over the past year with the ongoing war in Ukraine. But there continues to be a demand for energy throughout the globe to cool and heat homes and the power industry. For example, the agriculture and food industries use energy for things like irrigation, farm machinery, packaging, and distribution. In fact, direct and indirect energy costs can make up as much as half of variable costs for these industries.
Freight and Distribution Costs
There has been a steady increase in the cost of getting goods from one place to another. For example, the container freight index, which estimates the cost of moving goods via shipping liners, hit an all-time high of nearly $10,400 U.S. dollars in September 2021. By June of this year, it stood at just over $7,000, which is still about 250% higher than mid-year 2020 levels. Other freight costs, such as air and ground freight, have risen similarly.
One of the major drivers behind these rising costs is higher oil prices. But others include things like COVID-related issues, like staffing and a lack of parts. There have also been unlucky occurrences like the blockage of the Suez Canal in 2021 and some other major weather disruptions that have created transportation bottlenecks in the supply chain.
Other Issues
Supply chains are complex, so it's impossible to pinpoint all of the drivers of food price inflation. But there are a few others to consider. First, growers have been facing higher fertilizer and commodity prices because of Russia's invasion of Ukraine. Also, an unexpected outbreak of avian influenza (bird flu) has contributed to higher prices for poultry and eggs.
Is Inflation Relief on the Horizon?
There may be some relief on the horizon for out-of-control food price inflation. Even though the conflict between Russia and Ukraine hasn't been resolved, it appears that some major grain producers will have harvests large enough to help replenish some depleted reserves. This is vital for things like processing food as well as feeding livestock.
Although U.S. farmers cut back on soybeans, they are expected to have a massive harvest of corn this year. And major food companies like Tyson, Conagra, and McCormick have boosted their inventory levels to be better positioned in the face of future supply chain disruptions.
What Supply Chain Leaders Can Do
If your business is anyplace in the food supply chain, you can take some decisive actions to address the impact of inflation on your company's efficiency and profitability. Your strategy should begin with a detailed assessment of your business's contractual exposure. Organizations have been operating in a low inflation environment for several years. But now, it's important to assess the various elements of the business that can make a difference in overall results.
Identifying alternative, lower-cost suppliers is a vital short-term solution to address inflation. Beyond this, organizations can respond to inflation by improving supply chain resilience. Some of the ways your business can accomplish this include:
- Improve Visibility — You can improve visibility throughout your supply chain by leveraging various technology solutions like RFID tags and a warehouse management system.
- Establish Predictability — The same technology solutions that provide visibility can also give you predictability through real-time data and insights.
- Encourage Flexibility — Supply chain leaders should also find more flexibility by developing additional supplier sources to allow faster adaptation in the face of price fluctuations.
As to when inflation pressures will ease, there's no sure answer. But these are cyclical issues that require a deliberate and ongoing strategy. Businesses that invest in the right technology and embed more flexibility into their processes will achieve the best overall results.
