One of the positive things that we can take from the supply chain crisis, which is slowly easing, is that this very important aspect of getting fruits and vegetables from farms to supermarket shelves halfway around the globe has moved up from the management ranks and landed in boardrooms of companies throughout the world.
The smooth, and undervalued (read: cheap) shipping chain suddenly became a minefield of issues. This came regardless of if you are a vertically integrated multinational, or a retailer which left much of the logistics procurement and obscure dealings with ports, truckers, government agencies and shipping lines to category managers and the myriad of actors in a complex supply chain.
We will not go into the analysis of the shopping frenzy for durable dry goods that choked the supply chain, but naturally those dry goods are patient; they do not lose shelf life like fresh produce. For the last 14 years – using the 2008 subprime crisis that threw shipping into a tailspin as a reference point- the fresh produce industry has enjoyed overall hassle free and low cost shipping. This, in turn, placed a great deal of complacency across shippers, traders, category managers and supermarkets while inadvertently letting big liner shipping companies gain control over decisions regarding vessel rotations, ports of call, transit times and the fate of how and at what speed produce reached its destination.
Naturally, we have something called supply and demand, and during most of those years it was the former which was abundant as shipowners chased market share over profitability. Refrigerated (reefer) cargo, which apparently paid better money than dry cargo, was the pretty girl of the business. The pretty girl turned less so in the second quarter of 2020 due to the above-mentioned shopping frenzy, which put the reefer cargo back in its place of being a 5% complement to global shipping lines’ dry cargo business.
The Drewry Dry and Reefer Freight Rate Indexes are a perfect tell-tale of how things moved, and how fast they moved. While dry freight rates increased at an incredibly fast pace from the third quarter of 2020, reefer freights increased at a lesser pace. Now, as dry freight rates are rapidly decreasing, reefer freights are expected to only marginally decline from what are today historical highs. The reefer supply chain is at a precarious moment with extremely high input costs for materials such as fertilizer, packaging and energy plus the historically high freight rates. For many stakeholders, reefer freight rates remain unsustainably high. Many farmers – particularly those producing low value products – are shipping less as they are priced out of the market, or having to abandon lower yield acreage.
Although reefer freight rates have reached a point of making certain low value produce impossible to obtain a return to the farmer, the key issue is control and reliability.
Naturally the big news in shipping and supply chain circles is how German retailer Lidl took the apparently bold move of starting its own shipping company earlier this year, Tailwind Shipping Lines. This is a great example of ‘control and reliability,’ and little to do with cost. But it will give Lidl a yardstick to benchmark costs and have a deep understanding of all aspects of shipping, including the all-important asset part of the equation, which it has entered at a historical high.
While this appears as a landmark move for a supermarket and aimed at dry cargo goods moving from Asia to Europe, it is nothing new in the world of some of the biggest suppliers of fruits to those same supermarkets. Banana multinationals understood the term ‘control and reliability’ close to a century ago and set up their own shipping companies to ensure quality, speed to market and – most importantly at the time – to ensure there was a business. Chiquita, Dole, Del Monte, De Nadai, Orsero and Compagnie Fruitière all operate their own shipping arms, and for the most part they own the assets. In practically all cases, the reefer container ships they own have been built to their exact specifications to ensure a total landed cost that is close to impossible to compete within the long term. Today, those assets have eye-wateringly high valuations, vindicating those executives and boards that preferred not to go asset-light and sub-contract all shipping and logistics to mega-carriers.
Mega-carriers are no villains. They have built networks that have ensured an amazing globalization and access to affordable fruits and vegetables. But keeping checks and balances is now more important than ever, and the good news is that this aspect has reached board level. After all, you need to keep control of your business and understand the logistics from A to Z from the inside. This way you will ensure farmers obtain a fair price for their produce in the long term, supermarkets will benefit from always offering the best quality and freshness, the industry will have a more sustainable business model.
Keep the lessons learned over the last two years and ensure a balanced approach to shipping and logistics. You need it every day. Don’t let it slip from the agenda, even when it gets easy tomorrow.
• Philip Gray runs his own logistics business and advisory and is a senior reefer analyst with Drewry Shipping Consultants.