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Shortages Leading to Price Increases

Written by:
CFA, Financial Journalist and Entrepreneur

“There’s no lettuce in my burger”, complained a customer at a Toronto deli that I frequented in spring. Neither was he the only customer with that complaint nor was that deli the only one giving the leafy greens a pass! Drought conditions and crop disease in California created a shortage which led to a huge surge in prices. Supply chain headwinds dampened availability for those who could actually afford them. Thus, restaurants didn’t just reduce portion sizes or increase prices but omitted lettuce from their menu altogether, much to the dismay of salad lovers (myself included).

For a solid two years now, supply-led price rises have occupied financial headlines. It’s taken over brain space too as we’ve struggled to figure out how to expand our budgets to make way for these rising prices. Otherwise known as inflation in the world of economics.

What moves the prices of goods and services?

Two simple factors make up the market for a product – supply and demand. If a product’s supply and availability are high while demand stagnates, the market would price the product lower. However, if an in-demand product is in short supply, market forces drive the prices higher.

Producers increase the prices of their goods for two reasons. The first is because of an increase in the cost of raw materials used to make their product. Secondly, to gain the monetary advantage of the supply-demand imbalance in the industry they operate in.

Price rise/fall could be either demand-driven or supply-driven. This relationship exists for all products, including essentials like food. Hence, sometimes governments step in to ensure prices of essentials don’t spiral out of control. For example, grocery prices have been a huge concern in Canada. So much so, that the leaders of three top Canadian grocers were called to appear before a parliamentary committee.

2021 and beyond… the era of inflation! 

The recent price increases are a result of the release of pent-up demand coupled with a slow recovery of the production of goods and services. This has led to demand far outstripping supply.  Exacerbating the recovery are adverse weather, geopolitical tensions, labour shortage, raw material unavailability, and scarcity of transportation modes. This has created the perfect storm for a supply chain nightmare. Some companies found it difficult to source components while others struggled to fill vacant positions.

In 2021, the lockdowns in place due to COVID, followed by the Russia-Ukraine war created a massive shortage of goods and services. Russia and Ukraine possess a wealth of essential resources that they export to the world. The conflict also led to sanctions on Russia. This reduced the flow of goods from the countries, much to the detriment of countries that import many essentials as Canada does.

Russia-Ukraine contribution to the world’s pantry:

  • A third of the world’s wheat and barley
  • 70% of the world’s sunflower oil
  • Russia is a major distributor of Cod and Haddock in the world

Price consequences:

Within just one month of the invasion:

  • Wheat prices surged 50-60% in the US futures market
  • Sunflower oil prices rose by 50% 

Transportation – the added woe to the supply chain

It may also happen that while the product itself may be available, transportation has become a struggle. Along with kitchen essentials, Crude oil and natural gas took a hit. Russia is the third-largest Crude oil producer and second-largest natural gas producer in the world. Crude prices shot up and fuel for transportation and logistics became dearer.

Global trade is the backbone of the highly globalized nature of our society. When the basic ingredient required for transporting goods itself becomes expensive, the rise in the cost of goods is a given. A shortage in transportation containers and staff also played a part in the tangle of shipping issues. The market saw a backup of shipping traffic in some ports and a shortage of truckers to haul freight over long distances. Some freight carriers, unable to survive the pandemic, declared bankruptcy. YRC Freight Canada, in July, asked its truck drivers not to report to work as it filed for bankruptcy. This reduced the availability of transportation even further.

How to make business and supply chain more efficient

Businesses are faced with a very volatile production environment. However, there are some companies deploying tech-enabled solutions. They plan to utilize data that will enable efficiencies in decision-making, production and supply chain management. SCI, a leading Canadian 3PL provider provides data on inventory, daily orders, and shipment status. These foster improved decision-making when it comes to raw material inventory, trends in demand and freight rates. Supply chain solutions like these could help mitigate costs and risks.

Overused debt to stay afloat during these financially tough times? Our trained credit counsellors can help! Contact one to find out how.

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