Intense competition in the market is one reason companies such as Fresno’s Caro Nut are unable to pass on their higher production prices to customers. Caro Nut screengrab

published on July 6, 2022 - 1:16 PM
Written by Associated Press

With sky-high inflation, some industries are better positioned to pass on higher costs to consumers.

One of the Central Valley’s biggest industries isn’t one of them, according to a new report.

Comparing producer price increases to consumer price increases, experts with Vendavo — a Denver-based software and consulting firm — found energy companies passed on the most cost to their customers while food companies absorbed the most.

One local food producer attributes competition in the market for their inability to raise prices.

Mitchell Lee, VP of product marketing for Vendavo, said consumers face a lot of volatility in energy prices.

Supply costs for food producers on the producer price index were lower than average in December 2021, by nearly -.25%. By March, prices had risen nearly 2.5%. On the consumer end, prices have remained static going back to January with only 1% increases.

On the energy end, producer prices had dropped from a 7% increase to below 6% between February and March. Over the same period, consumer prices had increased from below 4% to nearly 11%.

For Pacific Gas & Electric Co., rates in March increased 11.3% on average to residential energy users, coming off an 8.1% increase in January.

For Southern California Edison, rates in March increased 7.7% on average to residential energy users — after a 2.9% increase in January.

The main driver of rate increases has been investment in reducing wildfire risks as well as increases in the price of fuel and power, said Gabriel Ornelas, media relations advisor with Southern California Edison.

Utility companies throughout California have been strengthening the grid in response to extreme weather and to reduce carbon usage, Ornelas said. There is no markup for fuel and purchased power.

“For every dollar we pay for fuel and purchased power, customers pay one dollar, there’s no markup,” Ornelas said.

Energy companies are very much used to volatility in their market, Lee said. Food processors, however, are not as used to the kind of volatility they are experiencing.

For Caro Nut, a Fresno-based nut processor, shipping costs have spiked, with demurrage — the cost to keep a boat at sea — increasing 200-300%, according to Priscilla Madrigal, director of sales.

Almonds are sourced locally, but cashews, macadamias and Brazil nuts all come in from overseas. Leads times for cashews have increased, now taking three to four months for delivery, Madrigal said.

“We end up having to compress our margins because we can’t just pass it on,” Madrigal said. “You can’t. You can’t pass on all the costs because you’re not competitive anymore.”

Lee said for food producers especially, raising prices presents a moral dilemma.

“What are the ethics to selling that bottle of water in a desert?” Lee said.

In response, sourcing teams for Caro Nut must be creative. They try to find ways to bundle goods together to get as much as possible in one shipment. The buying power of Caro Nut does help, said Madrigal, but the volume of their needs limits them from small suppliers as it doesn’t make sense cost-wise to pay for more, smaller shipments.

Ukraine is one of the largest exporter of sunflower seeds and because of the war, Madrigal says the crop this year will be affected with consumers seeing the impact of the war by August or September.

They don’t process sunflowers at Caro-Nut, so demand for their product may increase with lagging competition, but for other food processors, it may be devastating.

“That impacts the whole industry the way that moves because the demand is going to be there, but the supply won’t,” said Madrigal. “Good thing it didn’t coincide with baseball season.”

Lee said business-to-business transactions are more long-term, with a single transaction being the basis for the next one.

“How you perform under pressure and what kind of partner you are under pressure, it’s a real litmus test in terms of whether people want to do business with you,” Lee said.

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