The New York Times headline warned of fears of a bottleneck recession in Germany. Other headlines in the Wall Street Journal, the Financial Times, and elsewhere noted the impacts of production and distribution bottlenecks on specific industries.
Although the parallel is flawed, it is impossible for those of us of a certain age not to think back to the 1970s when shortages and bottlenecks created the unwelcome phenomenon of “stagflation” — a stagnant but inflationary economy.
Last week I wrote about the many bottlenecks inside the wine sector that make this a particularly interesting and difficult business. Today’s column steps back a few paces to look at the bottleneck economy itself and how its outside force impacts wine.
Yes, We Have No Bananas
The most obvious effect of bottlenecks is scarcity and higher cost. As I noted last week, ocean shipping bottlenecks both push up the cost of container shipments and result in shortages of the relevant products. Some shortages are transitory — the goods are delayed but they still eventually arrive — but other times the rising shipping cost makes delivery of the products uneconomic.
Long lines at petrol stations were a bottleneck result in the UK recently. The problem was a shortage of tanker truck drivers. There was enough gas I understand it, but too few drivers to get it where it needed to be. As soon as consumers caught a whiff of a theoretical shortage, of course, they all rushed to fill up their tanks at once, creating an actual shortage. The government has plans to mobilize some army drivers to help deal with the situation if it persists.
Boris Johnson’s administration advises that rumors that Christmas will not arrive this year due to a general shortage of lorry drivers are exaggerated. Good to know.
Bottlenecks in one sector often spread to related markets like a row of dominos falling one by one. A noteworthy case of this has happened in the UK, for example. Unseasonably slack off-shore winds this summer resulted in lower than expected electricity production from wind turbines, which shifted demand to generation plants fired by natural gas. This pushed the spot price of gas to very high levels, making the production of fertilizer suddenly uneconomic and forcing some fertilizer plants to shut down. Wind-gas-fertilizer. Got that?
Carbon dioxide is a by-product of the production of fertilizer from natural gas, so CO2 supplies fell. CO2, in turn, is important in the food industry and in wine production, too, so shortages and disruptions appear there. Thus did calm winds plus natural gas bottlenecks cause British food security to diminish.
Have you been out shopping for a new or used car recently? Cars today are really computers that happen to have wheels and can haul people and their stuff. The current very serious shortage of microchips is therefore a limiting factor on the production of both autos and all other the equipment and gadgets where computer chips are needed.
Shakespeare warned that for want of a nail a kingdom was lost. If he were writing today, he might pivot to microchips and car sales. With new cars in short supply, the prices of used cars have sky-rocketed.
One side-effect of such bottlenecks is a change in the commodity composition of production. If you don’t have enough chips to produce all the cars you’d like, how do you handle it? It make sense to reduce production of low profit vehicles and reserve the chips for high profit sales, which means pickup trucks and some SUVs in the US.
Another strategy is to reserve production for key customers where there is a long term commitment and cut back on other sales. In short, the bottlenecks affect what is produced, how much, who gets it, and at what price.
The Price Also Rises
Inflation is always a concern in the bottleneck economy and you can sense how nervous economic leaders around the world are as they sort through different measures of inflation and ponder whether specific price spikes will moderate as time passes or form a critical inflationary mass that, by altering expectations, becomes self-sustaining. If economic policy-makers react to inflation fears by jamming on the brakes, stagflation could result. That’s what happened 40 years ago and there is concern that history could repeat.
Should the short-term inflation burst endure, we would normally expect higher interest rates and changing foreign exchange rates to follow. Interest rates might rise as central banks act to push prices back down, but it seems more likely to me that the market will first push interest rates higher and then central banks will follow along. Just a guess.
A combination of higher interest rates (which tend to increase currency value) and higher inflation rates (which push in the opposite direction) make forecasting exchange rate movements even more problematic than usual. The US dollar’s value has risen recently, for example, as higher interest returns seem to have overcome concerns about higher inflation. Stay tuned.
Just in Time vs Just in Case
How should wine producers react to all this news? Many will simply tune it out but, as I like to say, denial isn’t just a river in Egypt. Ignore the shifting economic sands at your own risk.
One bit of practical advice is obvious: give serious thought to how exposed your business is to the various direct and indirect bottlenecks in your sector and take appropriate action. At the very least, starting moving from just in time to just in case sourcing if you can.
Beyond that, it would be a good idea to do a quick bottleneck risk audit. How much are you exposed to potential problems? And what about your customers and suppliers? One lesson this situation teaches us is that risk anywhere in the product chain is a potential problem everywhere in the product chain.
What about the big macro risk of stagflation? I don’t see things getting that bad yet, but stagflation puts economic policymakers in a bind and none of them really has a lot of room to maneuver right now. That’s why everyone is so jumpy about the inflation threat and why the recent IMF warnings are taken seriously. As Bette Davis said, fasten your seatbelts.