Agrochemical Supply Chain: Inventory Management Approaches Evolve Following Disruptions
14 December 2023 In recent years, the agriculture industry and other sectors have shifted from a “just-in-time” inventory strategy to a “just-in-case” approach, writes Cynthia McCann in a recent issue of AgriBusiness Global DIRECT. The lingering effects of the pandemic, including labor market challenges, transportation disruptions, and financial uncertainties, have prompted businesses to adopt a more cautious approach to inventory management.
Adding to the complexity, interest rates have risen sharply since March 2022, with the U.S. Federal Reserve raising rates 10 consecutive times. This, coupled with an oversupply of certain agrochemicals, has created a challenging business environment. The oversupply issue stems from an overcorrection that occurred in 2021 when inventory levels were too low.
Terry Kippley, President of the Council of Producers and Distributors of Agrotechnology (CPDA), explained that the industry overcorrected due to a scarcity mentality, resulting in excessive purchasing. While products are starting to move again, there is still a significant supply in the pipeline. Growers are now buying only what they absolutely need, while retailers are trying to empty their warehouses by avoiding restocking unless they have an order.
The oversupply situation has led to margin erosion, downward price adjustments, and higher carrying costs. Additionally, the impact of the swing from undersupply to oversupply takes time to propagate through the agrochemical supply chain. The demand signals from growers do not reach agrochemical producers overnight, creating further challenges for the industry.
Looking ahead, there is a hesitancy to place new orders, and businesses are trying to manage risk by minimizing inventory. However, Jim DeLisi, President of Fanwood Chemical, noted that the oversupply of agrochemicals was predictable based on statistics. Despite warnings of short supply, importers brought in substantially greater volumes in 2022, resulting in a crash in prices by early 2023.
DeLisi also highlighted the difficulty of diversifying the agrochemical supply chain. There are limited certified plants capable of manufacturing active ingredients, and the manufacturing capability in the U.S. no longer exists. Chemical manufacturing has shifted to the developing world due to trade agreements and tighter environmental regulations.
While the shift from just-in-time to just-in-case inventory management has become necessary, the goal remains the same: finding the right balance for the current business environment. Businesses must navigate the challenges posed by supply chain disruptions, fluctuating interest rates, and oversupply issues to ensure efficient inventory management.
In conclusion, the agriculture industry and other sectors have faced challenges in inventory management due to the residual effects of the pandemic and an oversupply of agrochemicals. Businesses must be cautious of overcorrection and strive to find the right balance in their inventory strategies. Despite the difficulties, there is an opportunity to optimize inventory management and adapt to the changing business landscape.
Explore more about how inventory management is changing in AgriBusiness Global DIRECT.
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