Food and beverage manufacturers could have little recourse to mitigate rising costs related to fuel and fertilizer bottlenecks caused by the ongoing conflict in Iran because they have already pulled most price management levers to offset pandemic and tariff related increases, a supply chain expert warns.
“Affordability is a really big issue for people. And it is bigger now than in the past, because people are still bruised from food prices going up during the pandemic. So, companies are really reticent to increase prices for consumers again,” said John Lash, SVP of e2open, a supply chain software and SaaS platform offered by WiseTech Global Group that tracks air and ocean freight disruptions.
But, he warned, the ongoing conflict in Iran that prompted the country to close the Strait of Hormuz has significantly disrupted shipments – including of oil and fertilizer – dramatically raising costs for farmers and, likely down the road, food manufacturers and consumers.
“Everyone is in a hard spot,” he said, noting that the speed of the outbreak means stakeholders didn’t have a chance to hedge supplies in advance, which means the impact on input costs is swift and stiff.
According to e2open, nearly 33,700 ocean shipments across about 200 vessels and 11,000 air shipments – or roughly 4.3% – have been disrupted already, which Lash warns is an early indicator of potential price pressures on food.
“Right now, two out of five ocean shipments are disrupted around the world, which is really, absolutely incredible,” he noted, describing the delays as a “canary in the coal mine” for the food industry.
He explained that while transportation disruptions are not a direct proxy for food prices, they are a significant input and leading indicator about whether the sailing will be easy or rough.
“Right now, we are getting to the bumpy stage,” he added.
Fuel and fertilizer: The ‘double whammy’
The closure’s impact on food can be traced to disruptions – and price spikes – of fuel and fertilizer, which directly impacts transportation and planting costs, Lash explained.
While he recognized that fuel prices are “volatile,” he noted that they surged more than 47% in March – surpassing $100 to $115 per barrel. So, even though prices dipped earlier this week, they still remain “a lot higher than they used to be,” Lash said.
Considering that fuel makes up roughly 30% of transportation costs, that near 50% in oil could translate to a 10% to 15% increase in transportation costs for food, he added.
At the same time, fertilizer – particularly nitrogen from the Gulf, which is crucial for crop yields – is heavily affected by the freight disruptions.
“Prices for nitrogen fertilizer went up around 30%,” which “puts a lot of pressure on an important input that farmers rely on,” Lash said.
“It is also one of the most expensive inputs for farmers – coming in anywhere between 10% and 20% of a farmer’s cost,” he said.
Because farmers need different fertilizers in different situations, they cannot easily swap one in for another the way food manufacturers might reformulate to keep costs down. In addition, the same shortages are impacting other nations as well, meaning farmers cannot simply import it from another location.
The increase in fuel and fertilizer costs together is a “double whammy for farmers, and with farmers’ margins already thin in most cases, these costs are eventually going to get passed down to consumers in the form of higher grocery prices,” he added.
Timeline for consumer price impacts
Food manufacturers may be able to hold off on price hikes for awhile, depending on the categories in which they play.
“The places where you are going see it first are in fresh foods, because that tends to have a lag of around two, maybe three months,” Lash said, adding the increase likely won’t apply to crops already in the ground, but rather new plantings as they go in the ground.
“Processed foods will be a little bit longer, like three to six months, and then meat even longer than that,” he added.
Even though produce will get hit first, Lash predicts that packaged food will bear the brunt of the impact because they have more tools for managing cost impacts.
Managing costs
Brands have a limited toolkit to manage rising costs, but Lash notes they could leverage shrinkflation.
During and following the pandemic, some consumers pushed back against paying the same price for smaller packages, but others appreciated lower entry price points that allowed them to buy products and stay within budget.
Hedging could be another option depending on how long the conflict lasts, but Lash notes there are limits to this strategy given the speed with which the conflict escalated and its ambiguous duration.
“If you can purchase stuff in advance, that is great, but the war is already happening. The barn door is open and the horses are out,” he said. However, he added, this might become a more useful tool depending how long the conflict lasts.
Even after the war ends, “getting the infrastructure going again and everything flowing again” will take time, Lash said. “It is not like a spigot where you can just turn on and turn off. … There will be some upstream disruptions that will be with us for awhile.”
While the current situation poses challenges for brand and consumers, companies can navigate the crisis with careful planning, innovation and monitoring of supply chain indicators, including tracking e2open’s weekly freight disruption updates.
