Latin America: How Agribusinesses Are Facing Supply Chain Challenges
When the coronavirus pandemic impacted supply chains across the world, the more flexible the supply chain, the easier it was for agribusinesses to pivot.
And those who had supply sources close to customers or markets suffered less than those that rely on more distant suppliers, explains Haozhe Chen, associate professor of supply chain management at the Ivy college of Business at Iowa State University.
Unfortunately, these advantages are not available for Latin America suppliers and importers. In fact, a reduction in international trade is one of the main reasons COVID-19 will cause the biggest recession the region has suffered since 1914 and 1930, according to the Economic Commission for Latin America and the Caribbean (ECLAC).
Add to that an unprecedented shortage of containers hampering trade’s recovery and the fact that the impact on freight rates has been greatest on trade routes to developing regions, and sourcing materials has definitely been no picnic for Latin American agribusinesses.
But some say the area’s proximity to North American markets, attractive labor costs, and liberal trade policies make it attractive as a global supply chain partner, but much of those predictions are highly dependent on very specific markets in the region.
Higher Costs & Lead Times
Since the fourth quarter of 2020, the supply situation has been challenging for Latin America.
Both cost and lead times have escalated.
Normally, in the past, shipping rates that once ranged from between $1,500 and $3,000 are now double or triple those rates, explains Daniel Traverso, gerente general, Anasac International Corp. “And lead times that were once about 20 to 30 days are now 45 to 50 days, depending on container availability,” he adds.
Not only do longer routes escalate costs, but more ships are usually required for weekly service on these routes, meaning containers get stuck. Then when empty containers are scarce, a Latin America importer must pay not only for the transport of the full import container but also for the inventory holding cost of the empty container, an UNCTAD policy brief explains.
The only way to deal with this situation for Latin American agribusinesses is to purchase products further in advance and increase their stock. Of course, “safety stock,” like other inventory, ties up cash and carries some risk. But it might be worth it when weighed against the cost of disruption, such as lost revenue and time, as well as higher prices, that might result in trying to quickly find materials that are in short supply.
Larger companies with the ability to negotiate container access will have an easier time, Traverso says, adding that companies with a better supply team management capacity, working capital, debt capacity, and flexible payment terms to dealers will fare better.
Limited Ports Bring Sourcing Challenges
One doesn’t have many ports to choose from in Latin American countries, which poses another challenge for businesses trying to get product to and from the region.
In Chile, for instance, there are major ports in San Antonio or Valparaiso. The situation is the same in Ecuador, Peru, and Colombia.
As such, you are stuck “dealing with the port you currently use,” Traverso says.
This lack of ports is one of the reasons why global supply chain logistics challenges are impacting Latin America more than North America.
“They just don’t have the volume to begin with,” explains Keith Holdsworth, a senior supply chain consultant with Perfection Limited, based in West Oxfordshire, England. “When you lose shipping lines and volume, the necessary inventory available to get what you need is diminished a good deal.”
Restructuring global supply chains so they become shorter, more diversified, and more regionalized is the trend many experts say are helping agribusinesses adapt.
Political Instability
Political instability can also be a huge threat to the success of agribusinesses operating in the global supply chain arena.
In fact, 63% of respondents to an American Productivity and Quality Center (APQC) study say their suppliers are located in areas of the world experiencing political turmoil.
For Latin America, this is certainly a current issue.
“This year, in addition to being in the middle of a pandemic, we had and will have presidential elections in Ecuador, Peru, and Chile,” Traverso explains. “That presents other challenges you have to know how to deal with.”
Experts suggest organizations better understand and prepare for the potential negative impact political instability can have on productivity, quality and relationships, and then create strategies to mitigates those risks.
Future Opportunities
The Economist’s Intelligence Unit released a report in 2020 predicting Latin America has the potential to gain from nearshoring in the coming decade, especially given some advantages, such as U.S. market proximity and increasingly competitive wages.
But the region faces some obstacles to supply chain integration, including poor infrastructure and logistics capabilities, as well as legal and regulatory deficiencies. Poor infrastructure, especially, has kept logistical costs high on a global comparison. “Logistical weaknesses are signs of larger policy deficiencies, particularly in areas of external trade, foreign direct investment, and technological readiness,” the report explains.
Costa Rica, Chile, and Colombia have the best positioning to potentially compete with Asia in supply chains, the report adds.
Despite all of Latin America’s supply chain challenges, Traverso says he actually hasn’t seen a current shortage of products. “Some prices increased in some technical grade or formulated products,” he says, “but not in general, and that’s helpful.”
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