- Juanita Schwartzkopf
Shortages: What Areas Should We Be Concerned About?
One thing the last three years has taught businesses is that they need to be prepared to manage through supply chain issues effectively. We have seen supply chains be impacted by plant shutdowns for Covid, labor shortages or labor mismatches, increased cost to ship by both truck and container ships, slowdowns in ports, political unrest, drought, excessive heat, unexpected frost, etc. Essentially every part of our economy has been impacted at times by one or more of these factors.
Looking at the fourth quarter of 2022 and the beginning of 2023, there are a few products that seem to be showing increased supply chain risks, and businesses and consumers need to be prepared for possible shortages. In this article, we will examine potential shortages related to food, medicines, and diesel.
Food crops such as rice, winter wheat, tomatoes and olive oil have been impacted by the severe drought conditions experienced in the US. While the November 3, 2022 drought map shows some relief compared to the August 9, 2022 map, the drought impact remains significant for the 2022 crop year.
In August, drawing a line from New Orleans to Seattle showed large crop producing areas of the US, to the south and west of the line, having extreme to exceptional drought impacts.
The November 3, 2022 drought map showed some relief in Texas but increasing drought pressures in the Idaho and Montana crop growing areas. Oklahoma and the Central Valley of California continued to be increasingly negatively impacted.
The 2022 USDA California table olive crop estimate is 20,000 tons compared to the 2021 crop of 46,500. Table olive bearing acreage in the US is estimated at 12,000 acres.
For potatoes, the USDA reported US potato acreage in 2021 at 943,000 acres planted with 910,000 acres harvested. For 2022 the planted acres were 910,000 with 902,000 acres expected to be harvested. The Restaurant Depot in West Plainfield, NJ implemented a three case limit on potato purchases in August of 2022. Some vegetable mongers tripled their prices for the low-grade potatoes that were available. One reason for this shortage is that the storage crop from the 2021 season was used up earlier than it normally would have been because the 2021 crop yield was down. For the 2022 crop year the number of acres planted is down and the heat conditions have reduced yield per acre.
Businesses and consumers need to be monitoring their supply of products and anticipating changes in the ability to adequately source supply at a price that was expected.
The fourth quarter of the year is one when consumers increase their baking and cooking, which results in increased consumption of butter. According to the USDA the number of pounds of butter in warehouses has decreased from 362 million pounds in August 2021 to 282 million pounds of butter in August 2022, for a 22% decrease in supply. In August 2022 the amount of butter in storage dropped 10% compared to just the prior month.
According to the September CPI the year over year increase in butter prices was 26.6%.
Supplies of cream are tight in certain areas of the US, which is impacting the ability to manufacture butter. In other areas, butter producers are regulating supplies to customers because the producers are unable to fill all existing orders. In other areas, producers are running reduced production schedules due to labor and energy issues.
Overall, consumers, food manufacturers using butter as an input, and any business using butter should all be concerned about both price and supply of butter entering the 2022 holiday season.
The US relies on overseas suppliers for the majority of the pharmaceuticals US consumers purchase. During the pandemic, consumers experienced shortages of simple drugs as a more common place occurrence than previously experienced. For example, acetaminophen was in tight supply in 2020, with 70% of the US supply manufactured in China and disrupted by China’s zero tolerance policy for Covid-19. Supplies of other drugs such as heparin, of which 80% is made in China, and a variety of antibiotics, of which the production is even more reliant on China, have been at risk. Amoxicillin, ciprofloxacin, and tetracycline have been impacted. High blood pressure medications such as valsartan have also been at risk.
Currently supplies of Adderall and Amoxicillin are at risk.
The FDA tracks drug shortages and posts information regarding supply issues on its website. Businesses may be at risk for labor issues tied to the inability of employees to acquire necessary medications.
The diesel reserves in the US have not been this low since 1951. The inventory today is 106 million barrels and demand is 4.2 million barrels per day – a 25 day supply. In October of 1951 the inventory was 102 billion, however demand was 1.0 million barrels per day – for a 102 day supply.
The area with the greatest shortfall will be the Northeast region, where inventories are down over 50% compared to last year and are at the lowest level since 1990. Refineries in this area operated at nearly 100% capacity during June, July, and August. Prices for November deliveries increased 33%.
The Midwest is also experiencing supply stress. With the Mississippi River water levels at record lows, the availability of diesel is uncertain and prices are increasing. In Memphis, TN the Mississippi Reiver is at minus 10.75 feet, the lowest ever recorded.
What can businesses do?
The pandemic has shown the risks inherent in Just In Time (“JIT”) inventory planning and has also shown the liquidity impacts of maintaining higher inventory levels. Businesses need to maintain more than one supplier relationship for key components and need to be able to tie at least some portion of prices paid for inputs to prices received for products.
Liquidity and working capital management have to be key planning areas for any business. The investment in inventory and accounts receivable is only partially able to be funded by accounts payable and borrowing under a line of credit. Companies are being confronted with working capital management issues on a daily basis.
Contingency planning should be a critical senior management focus as 2022 finishes and 2023 begins. Sensitivity analysis needs to be applied to financial forecasts. Performance risk must be evaluated related to labor, availability and cost of key supplies, energy costs, and generally increasing costs to operate.
Without this level of analysis and planning, businesses will feel they are moving from one crisis to the next. With additional planning, the uncertainty and related fears can be reduced. The ability to plan, evaluate and adapt continues to be the watchword for successful businesses today.