In January I warned of the imminent threat of higher prices for businesses and consumers. I was not being particularly prophetic but was simply following the cost tsunami that was developing from the world’s biggest influencer on manufacturing and trade, China. It was only a matter of time before a small, open and import-dependent economy like Jamaica felt the crashing of the waves.

That reality is now being felt and persons are naturally concerned, after all, cost is moving up but wages are not moving even close to the same extent – and many persons are nowhere near recovered from the fallout in their personal economy.

I will give my perspective on what is happening and offer some recommendations that could offset the pain.

THE MAKING OF A PERFECT STORM

Some developed countries have started their economic recovery and combined with expansive stimulus packages; their consumers are buying a lot of goods. After a prolonged period of lockdown, the need to release pent-up demand is real. To keep up with demand, companies in those markets are buying raw materials like crazy and pushing prices of these materials to the highest levels in decades. Commodity prices are multi-years high and almost all commodity prices are now above pre-pandemic levels – and are expected to remain there throughout 2021. At a local level, we have absolutely no influence on commodity prices; the major influencers will be the production decisions by major commodity producers, policy support measures in advanced economies and progress in containing the pandemic. According to a recent World Bank report, energy prices will be 33 per cent higher this year than in 2020, metal prices are expected to climb 30per cent and agricultural prices are forecast to rise 14 per cent due to strong demand from China and supply shortfalls from key producing countries.

Shortage of raw and packaging material

Recall when consumers were rushing to stores in the early part of the pandemic and clearing everything off the shelves? Individuals would go and buy more toilet tissue than they could possibly use. Well the same thing is happening now but instead of consumers, it is companies doing the panic buying. Of course, companies in advanced economies with purchasing strength can afford to do this, leaving the rest of us struggling to get supply. I personally experienced an important packaging supplier simply advising my factory that they would not supply us for 7 months because of increased demand in the USA.

Logistics nightmare

Shipping cost from Asia has gone up more than 300 per cent, showing no signs of easing in the short term. Not only has the cost gone up but there is a global shortage of containers and shipping space, which is putting many local manufacturers at risk as they simply cannot get their raw materials. Data from supply chain observers showed that 39 per cent of all containers missed their intended sailing in April 2021, and we have been advised by shippers to accept this as the new reality.

What is particularly different about the current situation is that it is not specific to a few industries, it cuts across almost ALL industries. It is affecting iron ore, steel, cooper, lumber, plastic, aluminum cans, cardboard, animal feed, fertiliser, wheat, soybeans, corn, and the list goes on and on. Although my interest in this article is specific to the productive sector, the importers of finished goods are similarly affected by price hikes and scarcity.

According to checks done with companies in the Jamaica Manufacturers and Exporters Association (JMEA), the extent of the landed price increase of raw materials is staggering – from 12-250 per cent. Obviously, this level of increase cannot be absorbed by the companies but at the same time, consumers simply will not have the disposable income to buy the same quantity at a higher price. Companies will have to dig deep to cut costs and boost productivity in order to manage the price increases that are being passed to consumers. Otherwise, the higher prices will lead to lower demand which could lead to lower production (unless exports increase) and trigger loss of jobs. Rising food prices could also lead to worsened food security, translating to nutrition deficit for a significant part of the population.

I am also concerned about the effect of rising input costs on farmers. Farmers have consistently been the highest risk-takers but the lowest beneficiaries in the value chain. I fear that without State intervention we could see agricultural output declining, thus putting a dampener on Jamaica’s growth recovery.

What can we do?

• It is not all doom and gloom; coffee is a beneficiary of rising commodity prices and this spells goods news for our coffee farmers, processors, and exporters. The bauxite industry is also a beneficiary, and I would expect that the JISCO factory (now closed) will see renewed urgency to resume production.

• We need to have a dedicated team at JAMPRO searching the global market for export opportunities. As a country, we have been successful in attracting investments but have been woefully inadequate when it comes to expanding our export. With demand in developed economies increasing, prices being attractive and the global appeal of brand Jamaica, this is a good opportunity to push export, especially of our natural products.

• On the food supply side, we need to strengthen our resilience and actively replace some of our import consumption (almost US$1 billion per year) with locally produced food. We are a small island and so we must import, as we cannot produce everything, but we have enough idle land to better feed ourselves and the rest of Caricom. The Government of Jamaica should move with urgency to take back leases on government-owned lands that are not being put to productive use. These lands should then be used to grow food for human and animal consumption.

• A big driver of local price is the foreign exchange (FX) rate. Remember, even for manufacturers the bulk of their input is imported. Do you remember when the pandemic started that there were predictions the J$ would completely collapse, after all, our biggest FX earner was shut down. That did not happen. Remittances over performed and the BOJ used its reserve intelligently. Now with the USA and UK population having a high level of vaccination, we anticipate a sharp recovery in visitors’ arrival (fingers crossed); bookings are already showing strong numbers for the summer. If we put the FX earning of the rebounding tourism industry in the current supply mix from remittances etc then, all else being equal, the increased US$ supply should lead to a revaluation of the J$ which will lead to better pricing from producers and improved purchasing power for consumers.

• As consumers, we need to shop wisely and buy local so that we support our own economy. Look at the advanced countries, they are putting their economies first! We need to start emulating them.

• This once in a hundred-year pandemic has created an upheaval that will continue to affect us in different ways for a while. Jamaica is too dependent on imports and the pandemic has truly highlighted this vulnerability. We should take the hard lessons and reset our economy to produce more, especially in agri-business. Truthfully, Jamaica is not likely to have a significant manufacturing industry without the presence of a robust agricultural sector.

I would love to hear your thoughts, link me on Twitter on @richardpandohie or on Facebook richard.pandohie.

Richard Pandohie is the president and chief executive officer of the Seprod Group. He is also the president of the Jamaica Manufacturers and Exporters Association.