Consumers may be seeing higher food prices in 2018 due to transporation and freight costs increasing at almost double the current rate of inflation.
Hormel Foods, General Mills and other food companies are already in talks with retailers about ways to pass on the increased shipping costs to consumers. The American economy is finally starting to reboot, but according to at least one analysis, trucking fleets and railroads have not expanded capacity to keep up with the new demand.
Reuters spoke with executives from a number of companies in the food, consumer goods and commodities sectors. All of the interviewees say their companies are struggling to protect their profit margins after transportation costs have increased 10 to 15 percent across the board.
Several factors have led to the increased transportation costs, but staffing seems to be main driver. Railroads CSX, Union Pacific and Norfolk Southern have all cut staff and are running longer trains to cut costs and increase profit margins. Shares are up 22 percent for the railroads over the past year, but the reduced capacity is leading to higher transport costs.
In trucking, the new federal regulation requiring drivers to electronically log their hours had led to an exodus. The enforcement deadline for the regulation is April 1, and many truck drivers are looking for new careers. Reuters further reports that the shortage is now chronic, because many drivers cannot make enough money under the new regulations to make the career worthwhile.
Rising energy costs are yet another factor. Diesel prices are sharply up from the lows in 2016. Plastics that are derived from petroleum products are costlier as a result, which is driving up packaging costs for food companies. All told, the expected margin cost headwind for food companies by the end of 2018 could be as high as 18 percent due to the above factors.
B&G Foods, Inc., Tyson Foods and General Mills are all anticipating price hikes on their foods at some point in 2018 to offset the increased freight charges. CEO Tom Hayes anticipates that Tyson — which owns Jimmy Dean sausages and Hillshire Farms — will have its price increases implemented during the second half of the company’s fiscal year. General Mills informed convenience stores and other outlets of its cost increases specifically, citing “logistics” as the reason.
Hormel Foods admits that it has been in talks with retailers about the possibility of price hikes. Hormel’s operating margin shrank by 2.4 percent during the most recent quarter, from 15.6 percent to 13.2. Much of that shrinkage was due to the increase in freight costs.
Mondelez International had to shut down its entire flour mill operation in Toledo, Ohio during one weekend in February. There were no rail cars available to ship flour to bakeries. Mondelez makes snacks and confectionaries, and the company had no comment when asked whether it anticipated pushing costs off to consumers.
The increased transportation costs could hit many additional sectors of the economy if some of the issues are not addressed, especially by the railroads. Norfolk Virginia and CSX failed to move more than 4 million tons of coal from West Virginia so far in 2018. Both rail lines lack the cars and personnel to move the coal. How long does the coal need to sit at the mines before home heating costs start to increase on the East Coast?
Train speeds are getting worse, and idle times for rail cars are also increasing in the first quarter of 2018. Norfolk Southern has no plans to hire additional staff or to pull more cars out of storage; the company spokesperson does say, however, that the rail line will increase prices on consumer goods this year. Union Pacific does plan to bring on 500 new employees soon to shorten rail car idle times.
As the driver shortage continues, trucking companies will no doubt be forced to increase wages for drivers this year. That is another cost that will no doubt be passed on to consumers.
All of these factors could indicate a period of inflation is on the way, which none of the transportation companies foresaw. If transport companies don’t adjust quickly, the costs of virtually everything that needs to be moved from Point A to Point B will be going up.
Regards,
Ethan Warrick
Editor
Wealth Authority
