Midwest floods create short and long-term concerns in the supply chain
By Purchasing Staff -- Purchasing, 7/17/2008 2:00:00 AM
While the short-term impact of the massive floods in the Midwest may be dealt with the long-term impacts may be felt for months to come.
In the days and weeks during and after the floods, the primary concerns to buyers and supply chain professionals were logistics-related. Railroads reported major stretches of track underwater, major highways in Iowa and Missouri were closed and damaged and a 300-mile section of the Mississippi River was closed to barge traffic. Union Pacific issued an embargo on its shipments, saying it was simply not able to meet its schedules in the region.
Buyers reported major delays in shipments as a result. “The rail line between Chicago and the west has been underwater for days,” says one respondent to a Purchasing.com survey. “This has halted intermodal traffic. I ship to the West Coast by rail exclusively. The cost to ship there by truck is double the intermodal price.”
Another said: “We are based in central Iowa and the floods closed road in our town as well as in Des Moines, Cedar Rapids and Waterloo. We order and ship material from all of these towns to our location, so our supply chain was messed up for over a week. Things are returning to normal now. Hopefully we won’t see any more rain for a while.”
The floods also caused some manufacturers to shut down production facilities. Cargill Inc., the largest U.S. agriculture company, declared force majeure on its corn-syrup supply contracts after flooding forced it to shut down its corn-milling plant in Cedar Rapids, Iowa. The Minnetonka, Minn.-based company won’t be able to fill all of its customers’ contracts, Cargill spokeswoman Liz Pearce said in a Bloomberg report.
Archer Daniels Midland also said it had a plant in Cedar Rapids downed by the floods. And according to the Iowa Renewable Fuels Association, a total of 300 million gallons per year of ethanol production capacity was forced offline by the floods at two plants: one owned by ADM and the other owned by Penford.
But the long-term impacts of the flooding could be more severe than delayed or even lost shipments. Because the floods were concentrated in Iowa and Missouri, the corn crop in the U.S. could take a hit this year, which would impact not only food prices, but also ethanol and thus gasoline prices later this year. According to Iowa Secretary of Agriculture Bill Northey an estimated 3.3 million acres of corn and soy beans were destroyed by spring floods in Iowa alone, pushing corn prices up to just under $8/bushel in late June on the Chicago Board of Trade before they trended down again. And the higher corn prices go, the thinner margins are for ethanol producers, so ethanol prices will go up.
In some cases, ethanol producers have simply shut down until their business becomes more profitable. David Driscoll, an analyst at Citigroup, said in June that as a result of the rapid margin deterioration, nearly 120 small to midsize ethanol producers “will be shut down over the next few months.” There are currently about 160 ethanol plants in the U.S., according to the Renewable Fuels Association.
But ethanol market experts warn that abandoning the biofuel altogether due to lower margins will only create more havoc for gasoline prices. “Abandoning our commitment to ethanol and biofuels, as some would suggest we do, would do nothing to provide meaningful relief from high prices today or in the future,” said Renewable Fuel Association President Bob Dinneen in a recent Dow Jones Newswires report. “It would absolutely force the price of gas through the roof and require the import of more record-high foreign oil.”
| Producer | Action taken |
| VeraSun | Delaying opening of two U.S. plants |
| Heartland Ethanol | Cancelled plans for seven ethanol distilleries |
| Poet | Not moving forward with Minnesota plant |
See also:
Special Report: How the Midwest floods are affecting purchasing
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