Inflation Nation: Broken supply chain adding cost to food, farming, building and industry

Freight congestion and delay costs has added to inflation in the supply chain. Photo / 123rf

The rising cost of living and the return of inflation is hitting Kiwis hard. In a new Herald series, Inflation Nation, we explore the reasons and impacts of the price shock - and possible solutions. We also share some great life hacks on how you can save money and live more affordably.

You'd have to have been living in another galaxy not to have felt the bite of inflation in "the supply chain" - that amorphous creature that delivers just about everything you eat, use, need, want, buy and sell but until the pandemic Kiwis gave little thought to, never mind a name.

Now "supply chain" is part of our daily lingo, mainly because it's congested by a consumer demand boom and a squeeze on ship and airfreight space and stretched to the max. Throw in a fuel cost shock and the upshot is increasingly costly on all our pockets.

Because it covers such a breadth of services from trucks, vans and ships to airfreight and rail, and its costs impact on everything from food delivered to supermarkets to supplies for wholesalers and retailers, construction, farming, manufacturing and industry, it's hard to reliably quantify an inflation percentage rate for the entire supply chain, say analysts.

But the figures that are available tend to be eye-popping.

Chris Edwards is right in the belly of the beast as head of national and international freight shifter Go Logistics and president of the Customs Brokers and Freight Forwarders Federation.

He says before Covid, the supply chain cost portion of the total cost of landing goods for a company would be around 5 per cent, depending of course on the value of goods.

Now the logistics cost is 25-40 per cent, he says.

"That's a situation that never existed before." (So is the burnout and exhaustion level in the supply chain workforce, he notes.)

His federation estimates importers and exporters using Auckland's port have paid around $146m to shipping lines in container congestion surcharges - and counting.

Rates charged by shipping lines since the pandemic outbreak have soared.

Pre-pandemic, shipping a TEU (twenty-foot equivalent unit) container to Shanghai cost around US$800 ($1180). Today it costs around US$6400 ($9446), says Edwards.

China is New Zealand's biggest export market.

Shipping a TEU to Hamburg, Germany, in 2019 cost around US$1000 ($1475) - now expect to pay US$5000 ($7379), he says.

Shipping line charges have soared since the pandemic outbreak. Photo / File

Nick Leggett, chief executive of heavy transport industry advocate Transporting NZ, says trucking companies are paying close to three times more for fuel than 18 months ago. The recent fuel price shock is the "evil twin" of inflation caused by wage rise pressure and a severe labour shortage, he says.

Historically the sector's had a poor history of passing on its costs to customers, mostly due to competition, but that's got to stop, says Leggett.

"Yes it will be felt by customers and consumers but we need a viable transport industry."

It's an industry that operates on small margins. A 7.4 per cent inflation rate come June, as predicted by ANZ Bank, will destroy those margins in quick order, sending transport companies to the wall, he says.

(ANZ estimates the direct impact of the Government's temporary 25c/litre reduction in the fuel excise tax could reduce CPI inflation in the June quarter by about -0.5 percentage points relative to that 7.4 per cent forecast.)

We've heard a lot about inflation in the cost of building a house. What's the impact of supply chain inflation in the sector that sells materials to builders?

It's ugly, says Steve Johnston, branch manager at building supplies company Acorn ITM of Hamilton.

"We used to get on average about 80 price increases (from manufacturers) a year. Last year there were about 460."

Most of those were due to increased freight costs, Johnston said.

"As a country we are reliant on imports. We have gone from being a country of creators to a country of importers."

The latest Consumer Price Index update from Statistics NZ showed in the December 2021 quarter transport costs rose 3.9 per cent, compared to the September quarter. This result was said to be influenced by private transport supplies and services, up 5.4 per cent.

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In the year ended December total goods and services imports rose 21 per cent to $88.9 billion. Exports fell 0.7 per cent to $76.7b, a deficit of $12.2b. Total goods imported rose 24 per cent to $69.6b while exports rose 6.8 per cent to $62.8b.

The update showed CPI inflation for the December year was 5.9 per cent, the biggest increase in the measure of inflation for households since 1990.

Supply chain inflation down on the farm is also ugly, says North Waikato dairy farmer Jim Cotman, who describes his operation as "modest".

The price of Cotman's chosen brand of eco-friendly nitrogen has gone up 89 per cent in the past year. A 12-tonne load of supplementary grain/palm kernel mix cost him $3987 in February 2021. Last month the price of the same volume was up 38 per cent.

In January last year, a delivery of diesel was 94c/litre. In January this year, before the Ukraine war crisis, it was $1.72/litre, a rise of 85 per cent.

Ah, Cotman hears you say, but what about your record milk price forecast?

"I haven't got it yet. It's a forecast. At $9.80 (per kg milksolids) compared to $7.60 last year it will be 28 per cent up. I'm not complaining about a good price but it also will depend on where the NZ dollar is sitting.

"Where is the inflation? It's the supply chain and freight and fuel. I can't say exactly where. But it's a huge increase for whatever reason. Inflation is only going to add to supply chain costs."

None of the commentators accepted the Government's explanation that the inflation they were experiencing was largely due to the global environment. The Government's economic management was also an influence.

Go Logistics' Edwards believes New Zealand has some "unique" inflationary factors.

"The Auckland port situation is still a diabolical mess - vessels are still going up to Northport which shouldn't be happening. The Government's tender for [development of] coastal shipping is $30 million. It sounds like a lot of money but KiwiRail has had $8 billion in the past five years."

As for what New Zealanders can do to fight back against inflation in the supply chain, opinion is very little, though government tax relief at the pump was a popular measure.

Edwards believes globally, inflation is reducing consumer demand, which should see freight rates drop and more options emerging.

Even the switch by importers from "just in time" ordering to "just in case" hasn't really eased supply chain price issues, he says.

"They call it "buffer or suffer" in my industry - bring in a lot more stock and hold it somewhere. But that only works if the supplier, say in Europe or Asia, has stock to sell. And the lead time from most suppliers in most industries is so elongated now that it's completely changed the landscape."