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Cheese Market: Closing Out a Wild Ride

  • Author : Ty Rohloff

A lot happened over the past twelve months.  We had closings and re-openings, passed and failed stimulus measures, labor has been a major issue along and now COVID continues to bring extra challenges to your workforce. And, unfortunately, it looks as though the long tail supply chain and transportation issues will persist into 2022. In the coming weeks, we’ll be analyzing how many in the industry navigated those challenges.

Bumps and Bruises

Some industries issues have no boundaries, while others pertain to certain geographies. For example, rural communities tend lack of an abundant labor pool, while more urban areas have competition to source employees. In the dairy processing sector, increased labor wages range anywhere from 10-50%. Most processors have been able to adjust margins to accommodate, but some have been limited to contract timing

When it comes to transportation and shipping, a recent Washington Post article noted that we’re facing a driver shortage of 80,000 drivers. Total driver numbers are down about 25,000 since 2019. From a supply chain issue, whether it’s supplies, shipping or receiving, we’re still in deficit mode. China has a robust lockdown policy. Recent cases in the province of Zhejiang, which includes the port in Ningbo -- one of the world’s largest container ports – have caused some concern. It’s becoming obvious just how fragile the food supply chain is.

The bigger question is: how are you positioned to work through disruptions including labor and logistics? How are you adapting and changing your business plan and planning for future risks? Plant automation solves some of the labor issues but is a stopgap in the larger picture, and can sometimes come with high capital costs.

Doom and Gloom?

While challenges persist, there are some silver linings. Demand and pricing have remained strong. Some are planning to expand capacity. Others have learned how to navigate the challenges through new products, new distribution channels and doing more with less. With the new stimulus and food box and school lunch support programs, demand is predicted to remain strong as consumers have discretionary income in hand.

The labor participation rate edged up slightly year over year to 61.8%, a 0.2% increase from November 2020. The annual inflation rate accelerated to 6.8% in November 2021, the highest since June of 1982. That’s nine consecutive months that inflation has been above the Fed’s 2% target. Economists expect a possible levelling off in 2022.

The Federal Reserve also sees three rate hikes in 2022 based on dot-plot projections. Lastly, the Fed expects to taper its monthly bond purchases and will start buying $60 billion of bonds each month starting in January 2022, half the level of November 2021 and $30 billion less than December 2021. We can speculate on the impact to rates, the yield curve has experienced some flattening in later 2021. No one know what global forces will create disruptions. Much less, it’s hard to predict where the environment will be 30 days from now, much less a year out from now.

What’s Next?

Be prepared. If you’re concerned about a rising rate environment, now may be the time to contact your lender to see what options you have. Some are able to lock in a longer term, others are using hedging instruments like swaps to manage longer term interest rate risk.

In regards to labor, think about how your workforce is performing. What has contributed to workforce retention? Conversely, what has led to labor turnover? One thing I’ve seen in over 20 years of conversations and observations is that workplace culture can support or diminish a quality workforce.

What are you doing compared competitors seeking those same employees? At what cost? What’s worked or what can you do differently as an organization to retain talent? The best products in the marketplace need a team to get to market and those with a strong culture tend to have the best results.

And finally, I continue to stress the importance of risk management. Has your plan changed in the last six months? What have you learned and how have you managed some of the newer risks you’ve encountered since the pandemic? How are you able to manage costs and pricing - by managing costs or by passing along those costs to the next level? My goal is not to try and solve the issues, but bring information and awareness to organizations so they can make the best decisions for their businesses. Look at tomorrow, not today. Today is done, keep a vision towards the future.

Ty
Rohloff

Senior Food and Agribusiness Lending Specialist
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