A perfect storm for American agriculture

Supply chains and inflation are topics on the minds of many consumers. The shortage of products ranging from building materials, microchips, baby formula to pharmaceuticals shows how our daily lives depend on global supply chains and the ever-increasing prices of the products they carry.

Especially for agricultural products, UConn researcher Sandro Steinbach, an assistant professor in the Department of Agricultural and Resource Economics in the College of Agriculture, Health and Natural Resources, warns that bottlenecks in the food supply chain could get worse. . Yet, he says, despite clear signs of the looming 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 created a unique set of circumstances for the shipping industry, including container shortages, the one you wrote about last year. What is the current status of the shortage?

Bringing a shipping container to the US costs around $6,000, while shipping a container outside the US costs $600, so shipping companies have an incentive to get empty containers to Asia quickly.

Those empty containers could be carrying produce, but they are not full, because the economic incentives are such that we have more durable goods (for example, furniture, electronics, and appliances) coming into the US. If you look at the balance of trade, you It’s getting more unbalanced, especially in the last few months. In January 2022, 67% of all containers leaving US ports were empty, and we essentially exported large amounts of cold air.

This is a significant development, particularly for agriculture, which relies heavily on foreign markets.

What kinds of measures are in place to address these issues for exporters?

US exporters have long benefited from low freight rates. Container shipping disruptions and other factors mean that if exporters are unable to export their products, it puts pressure on domestic players and inventories. Some of our maritime infrastructure is designed for the last century, but not for a highly integrated modern economy.

Sandro Steinbach.
Sandro Steinbach (Photo from the University of Connecticut).

The Biden administration allocated around $17 billion to deal with infrastructure problems, a considerable amount of money. The USDA has also committed additional funds to revive Oakland as an export location.

It will take a while to see how this plays out, because any adjustments or investments in infrastructure take 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, these investments aren’t going to do much.

Fuel prices are another factor adding to the inflationary spiral. Prices are now about $3 a gallon higher than last year, adding to the cost, a real problem for the trucking industry.

In the Midwest, 20% of all agricultural exports are by ship, 20% by rail, and almost 60% by truck, and that’s a huge amount for some crops. There is a heavy reliance on road transport, because the rail system has been cut and rail is less flexible. Flexibility is the beauty of trucks.

That’s one motivation to potentially move out of gasoline and into electric trucks. Still, there are no trucking companies offering electric vehicle solutions for large-scale agriculture. Once again, these adjustments may take a bit longer.

How are these disruptions affecting American agriculture?

We may see compound effects soon. For example, the Biden administration is going to increase the ethanol mandate to 15%, and there is competition over where corn goes. Will it feed people in Africa or will it feed cars in America? That is a potential tradeoff that is also seen in exporting goods to lucrative markets.

There are also many USDA subsidies. In some years, farmers got most of their income from subsidies, which is unreasonable because we always talk about America being an open market economy. Still, there is so much protection and market intervention going on.

Most of the subsidies go to the big players who generally have crop insurance, futures contracts and other financial instruments to deal with the uncertainty they face.

Some products do not have an exact price. I would say that prices are more realistic now and reflect a broader market supply and demand. Basically, the market has tightened, which is terrible for many industries that have been very oriented towards foreign markets.

Additionally, there have been large acquisitions by US companies of Asian companies that are diversifying supply chains by looking at exports. For example, Smithfield was acquired by a Chinese company and now exports a significant part of its production to China.

A big problem for shipping produce is perishability. I recently spoke with the manager of a walnut company and he set a good example for me. In April 2021 they loaded a container that took nine months to reach Europe. This product needs a controlled environment, but delays mean the quality drops along with the price you expect to receive. The shipment was for the European market and when it arrived it was no longer a B quality product. It is a C or D or F product potentially.

There are also concerns about impacts on access and quality, because exporters have limited control. Contracts can be made, but they can also be cancelled. Many container contracts have been canceled in recent months as shipping companies made more money shipping containers to Asia. Exporters are giving up the ability to export a product due to the access issue. However, shipping companies made the biggest profits in history. Maersk had its best quarters for a long time because rates went up.

When it comes to products like walnuts, additional inventories cannot be stored for years because quality and price drop, putting pressure on the domestic market. That’s the next thing that’s playing into this. There are many factors related to overproduction, and if you can’t export, it puts pressure on players and domestic inventories.

For high-value products, what we find is that the estimated export losses faced by the US fruit and nut industry from container shipping disruptions are more significant than the losses from the 2018-2020 Trade War.

Few people talk about it, and should we? That is the other question. It’s a market, should there be political intervention like during the Trump era? In our article, the statistics are surprisingly clear and show that something big is happening.

We have a perfect storm that could be hurting American agriculture. It’s a storm of $10 billion in six months. A 20% drop in agricultural exports and their ability to get products to foreign markets is a significant loss for American 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 significantly.

Everything has implications. There was a spending spree; now we have inflation, an explosion of imports and the war in the Ukraine. It all comes together, becoming a massive problem for American exporters and agricultural producers.

This work was supported by the National Institute of Food and Agriculture through the Food and Agricultural Research Initiative Award 2019-67023-29343.

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button