RPT-INSIGHT-Corporate America’s new dilemma: raising prices to cover higher transport costs

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    By Eric M. Johnson and Chris Prentice
    SEATTLE/BOCA RATON, Fla., Feb 26 (Reuters) - The drive for
cost cuts and higher margins at U.S. trucking and railroad
operators is pinching their biggest customers, forcing the likes
of General Mills Inc         and Hormel Foods Corp         to
spend more on deliveries and consider raising their own prices
as a way to pass along the costs. 
    Interviews with executives at 10 companies across the food,
consumer goods and commodities sectors reveal that many are
grappling with how to defend their profit margins as
transportation costs climb at nearly double the inflation rate.
    Two executives told Reuters their companies do plan to raise
prices, though they would not divulge by how much. A third said
it was discussing prospective price increases with retailers. 
    The prospect of higher prices on chicken, cereal and snacks
costs comes as inflation emerged as a more distinct threat in
recent weeks. The U.S. Labor Department reported earlier this
month that underlying consumer prices in January posted their
biggest gain in more than a year.              
    As U.S. economic growth has revved up, railroads and truck
fleets have not expanded capacity to keep pace - a decision
applauded by Wall Street. Shares of CSX Corp        , Norfolk
Southern        , and Union Pacific Corp         have risen an
average 22 percent over the past year as they cut headcount,
locomotives and rail cars, and lengthened trains to lower
expenses and raise margins.             
    Quickening economic growth, a shortage of drivers and
reduced capacity, and higher fuel prices have driven up
transportation costs, prompting some companies to threaten to
raise prices on goods ranging from chicken to cereal.
    For a graphic, click
    Cream of Wheat maker B&G Foods Inc        , Cheerios maker
General Mills and Tyson Foods Inc        , owner of Hillshire
Farms brand and Jimmy Dean sausage, said they will pass along
higher freight costs to their customers.
    Tyson Chief Executive Officer Tom Hayes told Reuters in an
interview that its price increases "should be in place for the
second half” of its fiscal year, and that it has begun
negotiating price increases with retailers and food service
operators. The company declined to specify how much its freight
costs increased in recent months, but a spokesman said they are
up between 10 to 15 percent for the total industry.
    General Mills informed convenience store and food service
customers of the price increases directly, a spokeswoman told
Reuters in an emailed statement, declining to provide specifics.
Chief Executive Officer Jeff Harmening cited logistic costs and
wage inflation as factors. 
    "It feels to me like an environment that should be
beneficial for some pricing,” he said in a presentation at last
week’s Consumer Analyst Group of New York conference.
    Hormel Foods, the maker of Skippy peanut butter and SPAM,
has been talking with retailers about raising prices, according
to Chief Executive Jim Snee.
    “We don’t believe we’re going to recoup all of our freight
cost increases for the balance of the year,” Snee told Reuters
in an interview, noting operating margin sank to 13.2 percent,
from 15.6 percent due to higher costs - including freight - in
the most recent quarter. 
    Confectionary and snack company Mondelez International Inc
         halted operations over a weekend late last month at its
Toledo, Ohio wheat flour mill - the second-largest flour mill in
the United States - because the plant could not get enough rail
cars to carry flour to bakeries, a spokeswoman said. 
    She declined to comment on whether Mondelez would raise
prices to cover any higher costs.
    A new government regulation for drivers and truck
availability are pushing up freight costs at JM Smucker Co
       . “We anticipate inflationary pressures likely to cause
upward price movements in a variety of categories,” Chief
Financial Officer Mark Belgya said last week at an analyst
    To be sure, transportation costs are just a sliver of the
price consumers pay at the grocery store. The U.S. Department of
Agriculture estimates transportation represents just 3.3 cents
of every dollar consumers spend.
    But an increase in truck rates over the next 12 months
implies a 15-to-18 basis point gross margin headwind for U.S.
food companies on average, according to Bernstein analyst Alexia
    “A lot of the consumer goods companies work on margin,” said
Joe Glauber, a former USDA Chief Economist and a senior research
fellow at the International Food Policy Research Institute.
“They are going to be pushing those costs along” to retailers.
Ultimately “consumers end up shouldering more of the burden,” he
    That would be a change for consumers who have seen years of
low-to-negative food inflation, he noted.
    Prices of key commodity ingredients including corn, sugar
and cocoa remain relatively low due to bumper harvests around
the globe. But even as companies’ freight costs increase, their
packaging costs are also rising, industry analysts said. 
    Global energy prices have risen sharply from 2016’s lows,
driving up prices for not only diesel but also packing material
like plastics, which are byproducts of crude and natural gas.
    Others companies have blamed freight hikes for lower
earnings forecasts for 2018, including U.S. oilfield services
company Halliburton Co        . It shaved ten cents per share
from its earnings forecast last week due to delays in deliveries
of sand used in fracking.              
    "They try to squeeze every dollar for profit rather than
provide service," said Robert Murray, the chief executive of
Murray Energy Corporation, the largest privately-owned U.S. coal
company which relies on CSX and Norfolk Southern to help
transport its goods. 
    Murray said both CSX and Norfolk Southern have lacked rail
cars and crew to haul 4 million tons of coal from mines in West
Virginia and Ohio to the Port of Baltimore this year. 
    CSX spokesman Christopher Smith said its service has
improved steadily over recent months and it was working with
customers to solve problems. Norfolk Southern declined to
    At an analyst conference Thursday, Norfolk Southern Chief
Financial Officer Cynthia Earhart said that the railroad was
looking to raise prices on consumer goods and other
truck-competitive freight it hauls in 2018. But she said it had
no plans to increase headcount or move equipment out of storage,
despite worsening train speeds and rail car idle times in the
first quarter. 
    Earhart said the railroad was moving some employees to
problem spots, like its terminal in Birmingham, Alabama, from
other areas of its network.
    Union Pacific has started pulling stored locomotives back
into service and plans to bring back 600 employees in the first
quarter 2018 to prevent rail cars from spending too much time in
yards, said Union Pacific spokeswoman Raquel Espinoza.
    The time UP rail cars were sitting idle in terminals rose to
32.5 hours in the fourth quarter from 29 hours in the year-ago
period, and its overall workforce dropped during the last two
quarters, according to company data.  
    Berkshire Hathaway's BNSF          said winter weather has
impacted velocity and fluidity on portions of its primary route
between the Pacific Northwest and Midwest, but said it has not
been cutting crews and rolling stock.
    U.S. truck fleets have not kept pace with growing demand for
different reasons, industry executives said. The April 1
enforcement deadline for a federal regulation requiring drivers
to electronically log their hours has effectively curtailed
capacity, adding to a chronic shortage of people willing to
drive trucks for the wages offered.                 
    Tight capacity means trucking firms have leverage as they
negotiate freight rates. Dry van shipping rates are expected to
rise as much as 10 percent in 2018, while "spot" rates for
last-minute cargo hit record levels in January before falling
slightly, according to online freight marketplace DAT Solutions.
    Chemical maker Chemours Company        estimates 30 percent
of its rail shipments have highly unpredictable delivery times,
while automaker Toyota Motor Corp          has struggled
periodically to get rail cars for finished vehicles at plants
served by the major railroads.   
    "If I was to ask for anything, it's consistency," said Lee
Hobgood, general manager of Toyota's transportation operations.
"I am not feeling cuts. I am feeling imbalance at times."
    Agribusiness giant Cargill           declined to quantify
how much its freight costs are going up and whether it would
pass costs on to its customers. But at a soybean processing
plant near Lafayette, Ind., Cargill has had such long delays
getting loaded railcars moved out, the company plans to buy its
own Trackmobile railcar mover to relieve the congestion. One
Trackmobile unit can cost at least $250,000.
    Brad Hildebrand, Cargill's Global Rail and Barge Lead, told
Reuters the Lafayette plant otherwise could shut down. 
    "When we load a train at one of our eastern elevators it
sits for an extended period of time before locomotive power and
crews can come in," Hildebrand said. "There is no slack in the
system to handle weather problems or even a small uptick in

 (Editing by Vanessa O'Connell and Edward Tobin)