Why do things cost more? The case of a granola manufacturer shows a supply chain in crisis

Just ask Michelle Pusateri, CEO and ‘granola master’ about Granola Nana Joes in San Francisco, named after his grandparents.

His homemade concoction is simple in terms of products: a handful of raw materials, mostly agricultural; nothing electronic, chemical or exotic.

But the company sources organic ingredients like nuts, seeds and coconut, as well as its packaging, from all over the world. Over the past 18 months, prices have skyrocketed and availability has tightened for many components of granola, largely due to the impact of climate change on crops, although the crisis in the chain supply and the shortages caused by the pandemic are also playing a role.

Nana Joes’ predicament sums up, in a nutshell, the challenges businesses and consumers now face in obtaining specific products. If he is going through such a difficult time, imagine the dilemma faced by automakers, whose products contain approximately 30,000 parts from around the world.

“With the prices rising and our (cost of goods sold) rising, we’re going to suffer a lot and I’m terrified that the supply chain shock will last until 2023 and beyond,” he said. declared Pusateri. “I have spent the last 11 years of my life building this business that was profitable last year, and I am now looking at a loss of almost $ 100,000 this year.”

Next year will be even worse. She expects to pay $ 342,000 more for raw materials for next year’s products, up 52% ​​from before the pandemic. So far, she hasn’t raised the prices (granola sells for between $ 9 and $ 11 a bag), but she reluctantly admits that she may have to.

Take organic gluten-free oats, grown in Canada. She uses 52,000 pounds a year. Climate change – especially drought – meant that its supplier, Central Milling Co., which grinds oats in Utah, could only afford 34,000 pounds – and they were costing 70% more than before the pandemic . To be on the safe side, she now collects all that oats instead of her usual order of 1,000 pounds a week, because she can’t risk another company coming in to buy them. But that means she must have found a lot of money on short notice for such a big purchase.

She’ll also have to pay more – she sets it at $ 1,000 to $ 2,000 a month – for storage space for all those oatmeal and other ingredients that she tries to stock up on when a shortage occurs. As it stands, the ingredient-covered bags, boxes and buckets are neatly stacked all around the perimeter of its manufacturing facility in the former American Can Co. building in Dogpatch.

Fortunately, Nana Joes had just secured an emergency pandemic loan from the Small Business Administration of nearly $ 421,000. The loan, called COVID-19 EIDL, has recently been expanded with a higher cap, deferred payment plan, and other features. It is the latest of the major COVID-19 relief funds for small businesses. She has 30 years to repay it at 3.75% interest.

“This is what saves us,” she said. “Otherwise, we wouldn’t have been able to get the oats.

But she worries about the whole string of small businesses like hers that don’t have deep pockets.

“Big business can grab all of these ingredients and drive the prices up,” she said. “They have relationships with the farmers to take the entire next crop. It will get worse and worse until there is no more (materials) for small businesses. “

She spoke to DC lawmakers via Goldman Sachs’ 10,000 small business voices initiative, which helps businesses on Main Street advocate on issues that matter to them.

“Making it clear that small businesses need more working capital for situations like this,” was one of the messages Pusateri said he shared with members of Congress.

Central Milling of Utah, its supplier of oats, ground flax, maple syrup, olive oil and chocolate, also epitomizes the agricultural problems caused by climate change.

Central Milling sells its primary product, organic wheat flour grown throughout western North America, to bakers ranging from The Mill in San Francisco to Maiden Breads in Pt. Reyes at the Richmond Bread Mill in Safeway. It also makes flour for Whole Foods and Costco.

From Texas to Alberta, Canada and the west, drought has affected crop yields for its farmers, said Nicky Giusto, vice president of sales and marketing for the 160-year-old company.

“Drought was the main reason we have had such short crop yields this year in every region,” he said. “California has been the hardest hit; we didn’t even have a harvest from California. Add to that the heat waves in the Pacific Northwest, Utah and southern Idaho – which have shrunk the crop even further. “

Even irrigated farmers couldn’t cope, he said: “It was so hot that the water evaporated as soon as it hit the ground.”

“Some crops have fallen by 5-10% and others have fallen by more than 50% in crop yield.”

Cereal prices are now 20-45% above normal, while freight prices are up 15-30% and sometimes even double, he said. “The market is so tight now that farmers are dramatically increasing their offers for wheat,” Giusto said. On top of that, COVID protocols in factories are slowing down manufacturing in its factories.

Central Milling, which processes about 2 million bushels of wheat (120 million pounds) each year, now charges an average of about 30% more for the organic flour and other grains it grinds, he said.

The bottom line: bread will cost more.

“People have to increase the price of bread; otherwise, they will go bankrupt, ”said Giusto.

As for the dried fruits and seeds that Central Milling imports from overseas, “they are scarce or extremely expensive and a lot of them are stuck on the water now,” he said, referring to the global supply chain crisis that led to dozens of ships. idle in the port of San Pedro while waiting to be unloaded.

The tight supply chain hit Nana Joe’s few non-farm products, the bags he packs granola in, and the six-pack boxes. Some 35,000 bags are on their way from Peru, weeks behind schedule and cost up 26%. On top of that, it may have to pay a port surcharge – an additional fee that port operators now charge on many containers.

Climate change in remote parts of the world has had a big impact. Monsoons and typhoons in the Philippines affected supplies of coconuts and coconut oil. Hurricanes in the Caribbean and flooding in South America affected cocoa beans for chocolate which is then processed in California.

California nuts also suffer from drought. Pusateri pays more for almond slices (she spends £ 26,000 a year), almond flour and pistachios.

Pandemic panic buying has reduced supplies of sunflower seeds (Mexico), olive oil (Tunisia), cinnamon (Indonesia), maple syrup (Vermont) and chia seeds (Paraguay).

“Everyone was cooking,” she noted.

Nana Joes was born by chance in 2010. Pusateri was looking for an energetic breakfast to feed herself while surfing Ocean Beach and Pacifica, and found regular granola to be too sweet. A pastry chef by training, she has developed her own recipe with more protein, fat and fiber and less sugar. She started giving it to friends and family, then found a few small markets to transport it. She quit her job at the Nopalito restaurant in San Francisco to care for her father, who was dying of brain cancer, and he encouraged her to start a business.

It is grown organically with no investor money other than family support. Last year it had sales of $ 1.97 million, or about 280,000 bags of granola (they range from 8 to 14 ounces). It is mainly sold in California, Oregon and Washington, with a few markets in New York and Texas.

She pays more to ship outgoing products. Part of the supply crisis is a shortage of trucks and truck drivers. The cost of transporting granola by truck to Los Angeles is now almost quadrupled. Trucking to Texas has doubled. In the other direction, hemp seeds from Canada and pecans from Texas are now more expensive to transport to California.

Work is an area where Nana Joes – unlike many other companies – has not felt the pressure. Pusateri has already paid his 10 workers between $ 20 and $ 27 an hour, well above San Francisco’s minimum wage of $ 16.32. As a result, she did not experience the attrition and inability to hire that has become common in many non-white collar jobs. However, it pays 13% more for workers’ compensation.

Pusateri is grateful to her vendors and farmers. “So many emails about stocks and calls about price increases and shortages,” she said. “Always giving us the opportunity to stock up and keep abreast of new shipments. “

Likewise, she appreciates her clients. “The support we have received over the years and especially at the onset of the pandemic when everyone came together and ordered our granola online, allowed me to continue to face any challenges and stay convinced that this too will pass. “

Carolyn Said is a writer for the San Francisco Chronicle. Email: [email protected] Twitter: @csaid

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