To say that fuel costs are top of mind for the produce industry could very well be an understatement. "The fuel increase is affecting everything across the board. Everything requires fuel and transport–from delivery of raw materials like seeds and fertilizers, packing materials, employees, farming equipment, harvesting produce and more," says Alex Zenebisis of Eagle Export, Inc./Alcaro Farms.
Brenda Haught of Creekside Organics agrees. "Fuel has always been a major cost driver in our business, and the recent spikes have made that even more pronounced. When diesel prices move, it's felt quickly across the supply chain," says Haught.
Top of mind of trucking and fuel rates. "Right now the impact we're seeing is almost entirely on the trucking side as most programs are moving domestically rather than on vessels at the moment," says Freska Produce International's Gary Clevenger. "Fuel costs are directly impacting freight rates. With diesel prices in California still significantly higher than the rest of the country, it puts West Coast shippers at a disadvantage." For example, on longer hauls, fuel surcharges can change delivered pricing and ultimately influence sourcing decisions.
Higher freight rates also put added pressure on margins and pricing. "Even small increases in fuel can translate into meaningful cost changes per load," adds Haught.
Vessel rates too
That said, rising rates are also being felt on ocean freight that carry a surcharge based upon the price of oil. "As the price of bunker fuel rises, so does the total ocean freight payable. This cost is borne by the growers in South Africa, Chile and Peru, among others, who ship their products by sea over great distances," says Mark Greenberg of Capespan North America.
Higher fuel costs are also driving up production expenses at the farm level—from field work to irrigation to packing. "For our growers, the concern is just as real. It's making it more expensive to get product to market. When those pressures stack up, it can tighten already thin margins and make planning much more difficult," adds Haught.
On which commodities is it being felt the most? It's impacting items that of course require longer distance travel or more temperature control than most given that reefer units add another layer of fuel demand during transit. Heavier commodities—like watermelon, celery, and cabbage—also feel it quickly because freight makes up a larger share of the total cost. "Lower-margin staples are especially sensitive to those shifts. Leafy greens like kales and collards are also impacted, as fewer cases per pallet can drive up the cost per sale unit," says Haught.
© BP America
"In avocados, this really highlights the structural advantage Mexico has. California fruit typically stays regional in the West due to freight economics, while Mexican fruit can ship more competitively across the entire U.S., especially into the Midwest and East Coast," says Clevenger, noting that as fuel rises, this advantage becomes even more pronounced. "Mangos are also feeling the pressure, particularly out of southern Mexico, where you're dealing with long domestic hauls into key U.S. markets.
If fuel remains elevated, it will continue to influence sourcing decisions and reinforce regional supply dynamics."
Costs and consumers
Certainly higher energy costs affecting the industry is seen as something making fresh produce more expensive to produce and bring to market. "We are passing on the increased costs to our clients and/or working on thinner profit margins. It's the only thing we can do," says Zenebisis.
However, that raises another concern. "This increased cost does not necessarily get compensated by higher prices in the market. That price is more dependent upon the supply and demand for the product than its cost of production," notes Greenberg. "With retailers across North America under increasing pressure to keep food prices stable, they are not especially eager to pay higher prices to compensate for the increased costs incurred in getting fruit to market."
He also raises the fact that the U.S. dollar has lost value against the South African Rand and the Chilean Peso which also hurts growers by returning to them less money in their local currency for the U.S. Dollar-denominated FOB value of their goods. "The weaker U.S. Dollar may be a benefit to growers in purchasing their U.S. Dollar denominated input costs such as packing materials, agricultural inputs, and ocean freight. However, the greatest part of a grower's production costs–labor–is denominated and paid in local currency. With a weak U.S. Dollar, each box is delivering fewer Rands and Pesos to the growers than it did last year," Greenberg says.
So how are growers and shippers managing these high fuel prices? For starters, it's being disciplined on logistics. "That includes maximizing truckload efficiencies, tightening routing, and being strategic about shipping points. That said, there's only so much you can do when fuel remains elevated," says Clevenger.
Planning and communicating
At Creekside Organics, it's working with grower partners to plan ahead and navigate cost pressures together. It's also working with its carriers with the goal of maintaining consistency and reliability along with carefully approaching routing, consolidation and load planning. Staying in close communication with customers is also key so there are no surprises.
"The biggest concern is sustained volatility. We've been seeing a lot of spikes. If that continues, it puts pressure on the entire supply chain via reduced carrier capacity, especially among smaller operators, more frequent and higher surcharges and increased cost of goods at retail," says Haught.
"If this continues, the biggest concern is margin compression and slower movement. Retail doesn't always adjust quickly enough to higher freight, which can back things up and put pressure on FOBs while costs stay high," says Clevenger.
Meanwhile in Canada, this week, Prime Minister Mark Carney announced the temporary removal of the federal excise tax on both gas and diesel starting next week and lasting until Labor Day. "I don't think it will change much. The increase in fuel prices outweighs the tax rebate," says Zenebisis.
Ultimately, Haught says the company is focused on stability. "Markets can handle higher costs better than they can handle unpredictability."
For more information:
Alex Zenebisis
Eagle Export, Inc./Alcaro Farms
www.eaglexport.ca
Brenda Haught
Creekside Organics
https://www.creeksideorganics.net/
Gary Clevenger
Freska Produce
www.freskaproduce.com
Mark Greenberg
Capespan North America
www.capespan.com
