Strategies For Building a Just-Right Inventory Management Model

By Cynthia Y. McCann
Contributor

Over the past few years, the agriculture industry and many others have adopted more of a “just-in-case” inventory strategy as opposed to just-in-time. Most supply chain experts opine that while the dramatic impact of the pandemic has eased, the residual effects on labor markets, transportation, finance, and monetary policy continues to create challenges for businesses.

At the same time, interest rates have seen a sharp rise. Starting in March 2022, the U.S. Federal Reserve has raised interest rates 10 consecutive times. It’s not just the jump in interest rates alone, but the current oversupply of certain agrochemicals that are contributing to a more difficult business environment.

Terry Kipley, President, CPDA

Terry Kippley, President of the Council of Producers and Distributors of Agrotechnology (CPDA), recalled “the scarcity mentality that resulted in everybody buying products.” Simply put, “The industry over corrected. People bought too much.”

While product is starting to move again, there’s still a lot of supply in the pipeline, he states.

In general, growers are pulling back and buying only what they absolutely need while retailers are trying hard to empty their warehouses.

“They’re not restocking unless they have an order. Everyone’s trying to unload inventory,” Kippley said.

“You had very high prices when inventory was low,” but now there’s margin erosion and downward price adjustments along with higher carrying costs.

Moreover, the impact of the swing from undersupply to oversupply takes a while to move through the agrochemical supply chain. The demand signals generated from the grower do not reach the agrochemical producers overnight.

“So really, the next question is, ‘How are we going to end the year?’” he said and advised to “be cautious of another overcorrection.”

Understandably, “There’s going to be a hesitancy to place new orders and people are going to wait as long as possible,” he said. “It’s going to be very tempting to let your inventory run down because you’re trying to manage risk.”

Nonetheless, Fanwood Chemical President Jim DeLisi said this latest oversupply of agrochemicals was actually “predictable to anyone who was watching the statistics.”

For example, numerous media reported last year that herbicide was in short supply, which resulted in United States (U.S.) importers bringing in substantially greater volumes in 2022.

Jim DeLisi, President, Fanwood Chemical

“Anything that could kill a weed — glyphosate, dicamba, 2,4-D — all of them were imported in volumes twice as much or more than what was imported in prior years,” DeLisi said. “People kept buying and buying, but then things started to crash.”

The crash happened quickly. “By the end of January 2023, the prices for glyphosate, glufosinate, and 2,4-D started to crater,” he said. “Those who got hurt were the ones who bought big inventories in November, December, and January, and now they have very expensive inventories to work off.”

Despite the data that was “in front of them,” he said, “people believed all the prognosticators who warned of short supply, and they kept bringing in material.”

Not only were businesses in the midst of supply chain disruptions caused by the (COVID) pandemic, they were also worried about China shutting down their industrial base ahead of the 2022 Beijing Olympics.

“The last time China held the Olympics [in 2008], they shut down their industrial base in order to clean the air. There were a lot of shortages as a result. But that didn’t happen this time. The collapse on deliveries that everybody was expecting this past February and March didn’t materialize,” DeLisi said.

On a positive note, DeLisi said, “There are very few, if any, stability issues [with these popular herbicides], so at least we’re not seeing any spoilage. Otherwise, this would really be a disaster.”

There are only a limited number of plants that are certified to manufacture active ingredients. The plants are highly sophisticated and require significant capital and time to construct.

In addition, the manufacturing capability in the U.S. no longer exists in order to produce the active ingredients domestically.

“Thirty years ago, for instance, you could make anything in Western Pennsylvania and West Virginia,” said DeLisi. “The plants, the equipment, the people, and the resources were there. But those plants are gone. They were shut down and bulldozed; literally hit with a wrecking ball. And chemical plants don’t do well when they’re mothballed.”

DeLisi added that the 1994 Uruguay Round of multilateral trade negotiations [under the auspices of the General Agreement on Tariffs and Trade], which led to the formation of the World Trade Organization on January 1, 1995, also contributed to a reordering of chemical manufacturing globally as chemical tariffs were radically reduced and/or eliminated in the U.S., European Union (EU), Canada, Japan and several other countries that signed on to the Chemical Tariff Harmonization Agreement.

At the same time, tighter environmental regulations also changed the chemical manufacturing landscape.

“The EU used to have the largest chemical industry in the world — much bigger than the U.S. and bigger than China and India combined,” said DeLisi. However, as the EU adopted more stringent rules around chemical manufacturing, particularly in the 1990s, most of it migrated to the developing world.

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Photo of Terry Kippley courtesy of CPDA
Photo of Jim Delisis courtesy of Fanwood Chemical