Insufficient capacity and overregulation in US trucking and railway companies, as well as higher oil prices, are driving up transportation rates across the country, rendering food and consumer goods retailers to consider passing these costs along to customers.
Kristian Rouz – Recent gains in international oil prices and rising operational costs for US truckers and railways is expected to support the increases in delivery costs, as well as the prices for consumer goods. This comes as logistics companies are seeking to pass along the costs to their customers, including in retail and wholesale, who in turn will seek to offset their rising expenses.
“A lot of the consumer goods companies work on margin,” Joe Glauber, formerly of the USDA, and currently of the International Food Policy Research Institute. “They are going to be pushing those costs along (to retailers).” After all, “consumers end up shouldering more of the burden,” Glauber added.
US private-sector enterprises most exposed to the fluctuation in delivery costs – such as General Mills and Hormel Foods, along with multiple supermarket and consumer goods chains – are facing the increases in delivery costs, according to reports from at least 10 executives from several industries.
Trucking costs have increased over the past several months due to the gains in crude oil prices, as well as last year’s hurricane in Texas, which caused disruptions in oil processing. Additionally, the rising costs of insurance and excessive regulation, as well as union activity, have all contributed to the increased spending of US truckers.
Subsequently, US transportation rates have jumped by up to two-digits over the past year, and many shippers are concerned this could affect both their profitability and customer service.
Meanwhile, railways aren’t in their best shape either. Most US rail transport is also dependent on the fluctuations in oil and diesel prices. Additionally, elevated security concerns in light of several recent major derailments have produced the urge for tighter controls, which is adding to the costs of transportation, and might also be causing delays.
Retail and wholesale industry executives – as well as those in the commodities sector – say they will raise prices this year, although it is not yet known by how much.
Among the items affected could likely be chicken, cereals, and snack foods – adding to the upward pressure on inflation. The US price index is currently at the Federal Reserve’s target of two percent, and price dynamics over the past few weeks suggest inflation is set to overshoot the central bank’s target.
This will produce a response in the form of an interest rate hike.
According to a separate report from the US Department of Labor, the US price index posted its largest increase in over a year last month.
US railways and trucking companies have yet to benefit from the Trump administration’s policy stimulus, as these two strategically important sectors are still struggling amidst burdensome regulations.
“When we load a train at one of our eastern elevators it sits for an extended period of time before locomotive power and crews can come in,” Brad Hildebrand, Global Rail and Barge Lead at Cargill said. “There is no slack in the system to handle weather problems or even a small uptick in demand.”
Neither the railroads nor major trucking firms have expanded their operational capacity since President Trump was elected, which is now also contributing to the rising transportation prices amidst the accelerating US business and consumer spending.
US railways, including Norfolk Southern and Union Pacific, have recently cut the amount of locomotives and carriages, and increased the lengths of their trains to cut costs and lift profitability. Trucking companies are facing a shortage of drivers and decreased capacity, not least due to union rules.
Subsequently, for the first time in many years consumers are set to experience food inflation – after more than a decade of zero-to-negative gains in food prices.