Early Season Market Report
As always, early fall is busy for us here at Silva. We have witnessed the summer rush for some ingredients and have started to prepare for the holiday season and our customers’ production schedules. At the same time, we are monitoring production at raw-material sites throughout the world.
In our upcoming crop report, we will be sharing our thoughts regarding bell peppers and tomatoes from China, carrots from European sites, as well as a brief outlook for the later fall crops such as sweet potato, pumpkin and our second harvest of spinach for the year. This update looks at some of the factors facing the dehydration industry and how those affect Silva’s product category and our customers.
Following a multiyear surge of the USD against most major currencies, the last five months have seen a sharp drop in the value of the USD. At this time, we don’t see any short-term changes to the current outlook. A number of traditional economic factors contribute to the current scenario, combined with global uncertainty regarding the current administration’s ability to drive a promised growth-friendly agenda.
While Silva engages in various activities to hedge against currency fluctuations, the recent drop has an impact on the product that is grown by our raw-material partners all over the world. We expect to see currency related cost increases starting with fall harvest for all of our products. Some of those increases will be off-set by favorable crop conditions and other market conditions, while for other crops, we will see the currency effect further accentuate difficult crop conditions.
We have worked for many years in providing stability and predictability to our customers. That work is continuing, as we seek remedial actions to reduce the impact of currency related volatility. Yet, the current sharp loss of value of the USD will be a factor in the overall costing of imported ingredients.
In China, we continue to see efforts by central and local governments to phase out coal as a source of energy. Dehydration is dependent on an energy source to generate steam for heating air that is used to dry our raw materials. This is an enclosed system, where coal is used as an energy source for generating steam and is not in direct contact with the fresh raw material. In general terms, we see the regulation restricting or banning use of coal move westward from the coastal cities to the inner provinces of China.
Currently, one-third of our supply chain in China is using sources other than coal as a source of energy. We expect that in the next 12 to 18 months, at least two-thirds of the supply chain will be powered using alternative energy such as natural gas or direct steam supply. Cultural differences and a different perception on the use of depreciation of assets creates scenarios where the fixed capital investment of upgrading boilers and other equipment is expensed over a rather short amount of time. Switching to alternative sources of energy is also bringing an increase of the direct cost of energy in addition to the investment in fixed assets.
Over time, we expect the increases to be limited to around 5% but we see regional differences in the short term. Provinces or regions that have recently made the switch to other energy sources tend to show greater price volatility. As noted in previous reports, we have a well-diversified raw-material supply chain in China. Therefore, we will be able to off-set some of the short-term cost increases through mitigating procurement strategies.
In general, Silva supports the switch to cleaner energy sources from a sustainability and environmental policy standpoint. We are, therefore, committed to assisting our production partners, through the on-the-ground work by Silva’s Quality Team in China, with reviewing contingency plans, and risk assessments as they introduce new energy sources to their production facilities.
Following a globally eventful period of both natural disasters such as hurricanes, regions of increased political tension such as the Korean peninsula, as well as an uncertain period for potentially changing trade policies in the U.S., we are continuing to review our own internal contingency plan. This work is always ongoing, but has been highlighted by recent weather related concerns in the US and other global political events.
Silva has a strong and well-diversified supply chain. We are bringing GFSI certified finished products to the market place from over 25 countries in the world. Our principles of finished goods production and comprehensive testing at our own facilities in Illinois leaves us well positioned to handle any short-term supply chain disruptions. We continually assess the level of safety stock from all of our origins, as well as more long-term development of sourcing strategies for the same ingredient from differing origins and hemispheres.
Should you have any specific concerns, please reach out to your sales representative to discuss the mitigating solutions Silva already has in place to protect your business.
Rest assured, we have confidence in the process.