Supply chains and inflation are issues on the minds of many consumers. Shortages of products ranging from building materials, microchips, infant formula to pharmaceuticals show how much our daily lives depend on global supply chains and the ever-increasing prices of the products they carry.
For agricultural commodities in particular, UConn researcher Sandro Steinbach, an assistant professor in the Department of Agricultural and Resource Economics at the College of Agriculture, Health, and Natural Resources, warns that bottlenecks in the supply chain food supply could get worse. Yet, he says, despite clear signs of the impending crisis, little serious action is being taken. His recent research has been published in the International Agricultural Trade Research Consortium Working Paper Series.
The pandemic has created a unique set of circumstances for the shipping industry, including a shortage of containers, that you talked about last year. What is the current state of the shortage?
Bringing a container into the United States costs around $6,000, while shipping a container out of the United States costs $600. Shipping companies are therefore encouraged to quickly bring empty containers back to Asia.
These empty containers could carry agricultural products, but they are not filled, because the economic incentives are such that we have more durable goods (eg furniture, electronics and appliances) entering the United States . If you look at the trade balance, it’s getting more lopsided, especially over the last two months. In January 2022, 67% of all containers leaving US ports were empty, and essentially we exported large amounts of cold air.
This is an important development, particularly for agriculture, which is highly dependent on foreign markets.
What kinds of measures are underway to address these issues for exporters?
US exporters have long benefited from low freight rates. Disruptions to container shipping and other factors mean that if exporters cannot export their goods, it puts pressure on domestic players and stocks. Some of our maritime infrastructure is designed for the last century, but not for a highly integrated modern economy.
The Biden administration has allocated about $17 billion to deal with infrastructure issues, a considerable sum. The USDA has also committed additional funds to reactivate Oakland as an export location.
It will take some time to see how this pans out, as any adjustment or investment in infrastructure takes a long time to materialize. For example, they expanded the Port of Los Angeles years ago, and it took several years to go through the environmental review process. If we’re talking about solving the problems we have right now, those investments won’t do much.
Fuel prices are another factor adding to the spiral of inflation. Prices are now somewhere near $3 a gallon higher than last year, driving up costs, a real problem for the trucking industry.
In the Midwest, 20% of all agricultural exports are by boat, 20% by rail, and almost 60% by truck, and that’s a huge amount for some crops. There is a heavy reliance on trucking, because the rail system has been reduced and rail is less flexible. Flexibility is the beauty of trucks.
It’s a motivation to potentially move away from gasoline and into electric trucking. Yet no trucking company is offering electric vehicle solutions for agriculture at scale. Again, it might take a bit longer for these adjustments.
How do these disruptions affect US agriculture?
We could see cumulative effects soon. For example, the Biden administration needs to increase the ethanol mandate to 15%, and there is competition over where corn goes. Will it feed people in Africa or feed cars in America? This is a potential trade-off that you also see in exporting goods to lucrative markets.
There are also plenty of USDA grants. Some years farmers got most of their income from subsidies, which is unreasonable because we still talk about America as an open market economy. Yet there is so much protection and intervention in the market.
Most of the grants go to big players who usually have crop insurance, futures contracts and other financial instruments in place to deal with the uncertainty they face.
Some goods are not priced accurately. I would say the prices are more realistic now and reflect the broader supply and demand in the market. The market has basically adapted, which is terrible for many industries that have turned heavily to foreign markets.
In addition, there have been extensive takeovers of American companies by Asian companies that are diversifying supply chains with respect to exports. For example, Smithfield was purchased by a Chinese company and now exports a significant portion of its production to China.
Perishability is a big problem for shipping agricultural products. I recently spoke with a nut entrepreneur, and he set a great example. In April 2021, they loaded a container which took nine months to arrive in Europe. This product needs a controlled environment, but delays mean the quality goes down with the price you expect to receive. The shipment was destined for the European market, and by the time it arrived it was no longer a B grade product. It is a C or D or F product potentially.
Access and quality impacts are also a concern, as exporters have limited control. Contracts can be concluded, but they can also be cancelled. Many container contracts have been canceled in the past two months because shipping lines have made more money sending containers to Asia. Exporters give up the ability to export a product because of the issue of access. Yet shipping lines have made the biggest profits ever. Maersk had its best quarters for a long time as rates rose.
When talking about products like nuts, the extra stocks cannot be stored for years because the quality and price drop, which puts pressure on the domestic market. That’s the next thing that plays in there. There are many factors related to overproduction, and if you cannot export, it puts pressure on domestic players and stocks.
For high-value products, we found that the estimated export losses suffered by the U.S. nut and fruit industry due to container shipping disruptions are greater than the losses from the 2018-2020 trade war. .
Few talk about it, and should we? That’s the other question. It’s a market, should there be political intervention like in the days of Trump? In our article, the statistics are surprisingly clear and show that something important is happening.
We have a perfect storm that could be detrimental to American agriculture. It’s a $10 billion storm in six months. A 20% drop in agricultural exports and their ability to move products to foreign markets is a major loss for US agriculture, and we don’t pay enough attention to it.
We need more discussion about how we can help farmers meet these challenges. And it’s not just farmers, but the entire food processing industry that has lost a lot.
Everything has implications. There was a spending spree; now we have inflation, an explosion of imports and the war in Ukraine. It all comes together, becoming a huge problem for US exporters and agricultural producers.
This work was supported by the National Institute of Food and Agriculture through the Agriculture and Food Research Initiative Award 2019-67023-29343.