Author: Philip J Palin

Mid-summer US grocery flows

Posted on by Philip J Palin

The US grocery supply chain continues to close the gap between demand and supply.

Despite (and because of) high food inflation and plenty of competition for spending (e.g. eating out and travel), in June US consumers spent almost one-fifth more on groceries than in June 2019 (see first chart below). Inflation-adjusted spending is flat or incrementally down, but Americans are still buying many more calories (not just spending many more dollars) than pre-pandemic (more and more and more).

Despite this very strong pull, push is catching up. According to IRI, there are now fewer stock-outs than earlier this year (see second chart below. Since January there have been improving inventory levels for grocery stores (see final chart below). We are now very close to parity with 2019 grocery inventories. These are May numbers from the US Census survey. Based on what I have heard from grocery distributors, I bet the inventory to sales ratio further improved in June and July (more).

For my friends in the grocery industry — and for general economic reasons — I am glad that we have not seen significant demand destruction for groceries as inflation and spending-competition increase. I will also confess: such persistent pull so much higher than pre-pandemic surprises me. The response by production, distribution, and retail players has been creative, risk-taking, and — as demonstrated by the numbers — effective.

Fuel and food twist and shout

Posted on by Philip J Palin

Deutsche Welle tells us: “Water levels in the Rhine River are just inches away from forcing another shutdown of ship transportation.” Freight volume at Rotterdam was basically flat in the first half of 2022. Loss of the riverine connection, especially if early in the second half, would further narrow flows.

Slower and lower flows characterize many aspects of a Europe once again at war and worried about what’s ahead.

As this blog has repeatedly reported, Russia’s oil — despite various sanctions — continues to flow. More effort is required to buy it, but it is still sloshing about the world. Below are charts from S&P. (The original S&P resource is interactive and very much worth accessing, please also see the shifting sources of European oil imports since February.)

Yesterday there was good news that Nord Stream 1 has resumed operations (more and more). For now the flow is one-third or, perhaps, two-fifths of heretofore, but Europe is happy to get it here and now. Tomorrow is another day.

More good news — or at least progress toward potential good news — in releasing more flows of Ukraine’s grain to world markets, especially customers in the Middle East and Africa. Today a Turkey-brokered agreement will be signed in Istanbul. According to France24, “A coordination and monitoring centre will be established in Istanbul, to be staffed by UN, Turkish, Russian and Ukrainian officials, which would run and coordinate the grain exports, officials have said. Ships would be inspected to ensure that they are carrying grains and fertiliser rather than weapons. It also makes provision for the safe passage of the ships. The control centre will be responsible for establishing ship rotation schedules in the Black Sea. Around three to four weeks are still needed to finalise details to make it operational, according to the experts involved in the negotiations.”

Disrupted channels are the most common complication facing high volume (and especially high velocity) demand and supply networks. Severe reductions in discharge of Ukraine’s grain are a dramatic example. But what we also see is that where effectual demand and production persists, the flow of supply may twist, turn, and cuss, but continue…

BELOW: FIRST FEBRUARY, SECOND JULY

The pour continues, swallow carefully

Posted on by Philip J Palin

[Update below]This morning natural gas is flowing again in the Nord Stream 1 Pipeline. This is a principal channel for natural gas from Russia to Western Europe. The pipeline had been closed for usual summer maintenance. There was, however, concern that future flows could be held hostage to posturing related to the war in Ukraine (more and more and more).

According to Reuters, “Nord Stream 1 transports 55 billion cubic metres (bcm) a year of gas under the Baltic Sea and has been offline since July 11… A spokesperson for Austria’s OMV said Gazprom signalled it would deliver around 50% of agreed gas volumes on Thursday, levels seen before the shutdown.”

Depending on demand and availability of other sources, natural gas typically provides between one-fifth and one-quarter of European Union grid generation (see chart below). Over the last two weeks, reduced wind and heat-related high demand have increased natural gas draws. On some recent days natural gas has provided nearly one-third of EU generation.

Despite the temporary shutdown of Nord Stream 1 and strong demand, European natural gas inventories have not (yet) fallen during July and storage domes are about 65 percent full, ranging from a low of 42 percent in Bulgaria to 100 percent in Portugal. France is at 72 percent. Germany’s natural gas inventories are currently measured at 65 percent full.

According to an S&P report on German natural gas purchases, “The share of Russian gas deliveries averaged 55% in the past, but this fell to 26% by the end of June,” the [German economics] ministry said, adding that last year Russia supplied 46 Bcm of gas to Germany. The lower share in June is a result of Russia’s Gazprom cutting supplies through the Nord Stream pipeline to just 40% of capacity in mid-June, citing issues with maintenance at a key compressor station. The ministry said the claims of technical problems was a “pretext”… Germany currently does not have the infrastructure to directly import Liquified Natural Gas (LNG) (more).

The natural gas network crossing west from Russia through Ukraine continues to operate at less than half its 2020 capacity and flows. Most recent deliveries are to Veľké Kapušany, Slovakia, with Hungary a distant second-place recipient.

The prospect of natural gas shortages during a war-torn European winter has increased the need to maximize inventories and diversify channels and sources.

US LNG exports to Europe have been lower than expected partly due to the fire-related loss of the Freeport LNG terminal in early June. This is usually the second largest of seven US LNG export facilities. But other LNG operations are exporting at full capacity (more). Loss of Freeport has also meant lower than otherwise natural gas prices. Without this, current electric rates in heat-ravaged Texas (and elsewhere) would be even higher.

So obvious it is barely more (or less) than nagging, but still: Concentrating flows to fulfill demand usually enhances efficiency and always concentrates risk. The most beautifully planned bottleneck is one surprise short of becoming a chokepoint.

July 25 Update: Nord Stream 1 flows will now be cut to 20 percent of once-upon-a-time expected. According to the Wall Street Journal, “Russian state-owned energy producer Gazprom PJSC said gas exports through the vital Nord Stream pipeline to Germany would drop to about a fifth of the pipe’s capacity, blaming sanctions-related problems with turbines that have already reduced flows. The fresh reduction in the pipeline’s capacity—from 40% currently to 20%—is expected to take effect Wednesday, Gazprom said.”

Feeling the burn

Posted on by Philip J Palin

Several consecutive days of high temperatures across much of North America and Europe means much more demand for electricity, especially for air conditioning. Over the last decade-plus there has been considerable conversion to natural gas for grid generation. Today close to 40 percent of US electrical generation depends on natural gas.

Until recently, natural gas could claim a significant price advantage over other alternatives. Not so much now. US prices lag global, but the 90-101 percent increase in global benchmarks since January has also pulled US natural gas prices higher especially with recent spikes in domestic demand. According to S&P:

On July 21, the US power burn is forecast to average 48.6 Bcf/d in what would be a new single-day demand record, according to data from Platts Analytics. Assuming the forecast is accurate, the new high would outpace the prior single-day record from July 2020 by over 500 MMcf/d, or about 1%.Already this month, generator gas demand has trended a record-breaking pace for July of 44 Bcf/d. Compared with July 2020, when low prices made gas a go-to fuel for power generators, demand is up about 650 MMcf/d, month to date. Compared with July 2021, generator demand is up by a brow-raising 6 Bcf/d or almost 16%, this month… [See chart below]

Higher prices are tracking this demand. For example the US benchmark Henry Hub futures market is displayed in the second chart below. But paying more for abundant supply is much better than European prospects for not having enough no matter how much is paid (more and more and more and more and more to come).

Dog days bite and hold on tight

Posted on by Philip J Palin

[Updates below] Several days of unrelenting triple digits plus several million people plus an electric grid (more) built for considerably lower demand: Do you perceive a potential problem?

You can keep looking here:

Energy Reliability Council of Texas (ERCOT) Dashboard

Unfortunately the EIA Electric Grid Monitor continues to be down…

Here are some prior comments on the near-term risks facing Texas electric power consumers and downstream systems… meaning most of modern life, certainly including supply chains.

Texas is not the only region facing serious gaps between demand and current grid power capacity (more and more). But the Texas grid is designed to be even more self-reliant than most, and arguably more vulnerable as a result.

Monday Afternoon Update

At 3:30 Central Time the temperature in Dallas is 108 degrees Fahrenheit. Demand is about 2100 megawatts less than current capacity (not counting ancillary services) or within three percent of current capacity. At 3:47 demand was slightly higher. At 3:57 electrical use had increased by about 360 megawatts. I will admit my felt concern was heightened when 1200 miles away a thunderstorm knocked out our grid for about an hour while I was monitoring ERCOT. It is much better to look at supply-and-demand measures than an outage map.

According to S&P today’s most serious threat for continued flows may come at sunset when temperatures will still be in the triple digits and solar power drops. Texas spot prices for natural gas are surging.

July 19 Update: Below is the complete demand curve for the ERCOT grid on Monday July 18. Despite the high temps, demand stayed just below production capacity even as the sun set. But the forecast is for as hot or hotter today… and August is still to come.

Inch by inch, step by step

Posted on by Philip J Palin

Bloomberg has posted a very helpful overview headlined “Supply Chains Inching Back to Normal“. The report includes recent assessments and charts by Oxford Economics, Flexport, Freightos, and more. The core takeaway: “Economists generally agree that US household demand for merchandise will be key to watch in coming months, but they’re split about whether it will stay strong or start to soften.”

Last week’s June retail sales figures have been read by many as a stay-strong signal. There are, however, start(ing)-to-soften signals too. For example real consumption for food-at-home and real consumption of durable goods are both well off peak.

Below are two Federal Reserve sources for overall supply chain fitness. (GSCPI is mentioned but details are not included in the Bloomberg report. The Cass Freight Index is not mentioned.) Given the high-pressure on US supply chains in 2021, this is one time when down-hill slopes are welcome.

Reduced demand and related cooling of friction are also apparent in other freight market indicators. Just one: the van load-to-truck ratio is 30 percent below June 2021. As previously outlined, I expect this softening to widen and persist. I hope for a few months of gliding, rather than sharp drops in demand.

But as the two charts below also suggest, US flows continue to be volatile. There are plenty of current problems (more and more and more) with risks worth anticipating. In the classic Three Stooges routine — inch by inch, step by step — the slow turn is not achieved without related pain.

Retail sales increase

Posted on by Philip J Palin

Retail sales in June 2018 were $437,527 million. Retail sales in June 2019 were $448,992 million. Good growth. Steady growth. For most Americans the summer of 2019 felt like a prosperous time.

Retail sales for June 2022 were, according to this morning’s US Census Bureau survey, $594,499 million. (See chart below for 2018 to current, seasonally adjusted.) This is a new, inflation-fattened record.

A generous extension of 2015-2019 sales might have us buying about $500,000 million last month. Instead we spent one-fifth more than pre-pandemic trends. Given the unusual amount of cash burning in our pockets (top 1 percent, bottom 50 percent, and more), this is not surprising (warning: Fed data not updated since 1st Quarter, but still…) Given strong employment and steady wage growth, any sharp decline in spending would be surprising.

But no wonder we have continued supply chain challenges. I had really hoped for a continuation of May’s very modest softening in sales. Given this level of demand, I am even more impressed with current fulfillment.

No wonder Wednesday’s Consumer Price Index found such significant inflation.

Contemporary economies are addicted to growth. There are good reasons (and good outcomes). But every addiction has its dark side. Inflation is the current shadow. The possibility of recession preoccupies the imagination of many. But I will suggest, just several months of steady could be a sunny tonic.

Consumer Price Index: Food

Posted on by Philip J Palin

Above are the headline numbers for June CPI: Overall up 9.1 percent, core (less energy and food) up 5.9 percent over the last twelve months. This is a couple of decimal points higher than expected… and expectations were plenty high. Still, given prices at the pump for most of June, not a huge surprise. Rents are also rising fast. The slight, continuing decline in core inflation is more interesting to me.

Food price hikes pale next to fuel, but so did the faces of many June grocery shoppers. Most US consumers under age-60 have never experienced this size and rate of food price increases. We also know that, partly as a result of prices, inflation-adjusted grocery expenditures have been falling all this year. I have predicted real food-at-home expenditures still have a ways to fall until intersecting with pre-pandemic trends. (More on food price trends.) Given June’s velocity of food price increases, I will be surprised if demand destruction has paused. This also tracks what I hear informally from retailers and distributors. While total revenues are still going up, actual volume of groceries shipped is declining. This dynamic has started to show up in a reduced incidence of stock-outs.

Reduced demand is reducing friction in food supply chains.

+++

Here’s this morning’s full statement on food from the Bureau of Labor Statistics:

The food index increased 1.0 percent in June following a 1.2-percent increase the prior month. The index for food at home also rose 1.0 percent in June, the sixth consecutive increase of at least 1.0 percent in that index. Five of the six major grocery store food group indexes rose in June. The index for other food at home rose 1.8 percent, with sharp increases in the indexes for butter and for sugar and sweets. The index for cereals and bakery products increased 2.1 percent in June, with the index for flour rising 5.3 percent. The dairy and related products index rose 1.7 percent over the month, following a 2.9-percent increase in May. The fruits and vegetables index increased 0.7 percent in June after rising 0.6 percent in May. The index for nonalcoholic beverages rose 0.8 percent over the month. The only major grocery group index to decline in June was the index for meats, poultry, fish, and eggs which fell 0.4 percent over the month as the indexes for beef and pork declined.

The food away from home index rose 0.9 percent in June after rising 0.7 percent in May. The index for full service meals rose 0.8 percent over the month. The index for limited service meals increased 0.7 percent in June, as it did in May.

The food at home index rose 12.2 percent over the last 12 months, the largest 12-month increase since the period ending April 1979. All six major grocery store food group indexes increased over the span, with five of the six rising more than 10 percent. The index for other food at home increased the most, rising 14.4 percent, with the index for butter and margarine increasing 26.3 percent. The remaining groups saw increases ranging from 8.1 percent (fruits and vegetables) to 13.8 percent (cereals and bakery products).

The index for food away from home rose 7.7 percent over the last year, the largest 12-month change since the period ending November 1981. The index for full service meals rose 8.9 percent over the last 12 months, and the index for limited service meals rose 7.4 percent over the last year.

Dancing with the devil?

Posted on by Philip J Palin

[Updates below] Dallas did not go dark on Monday. The Texas grid is flowing strong. But there was cause for concern.

Sustained temperatures above 100 degrees resulted in record high demand for electricity. Persistently high temperatures are forecast.

This year demand for electricity in Texas is regularly exceeding prior records (here and here and here). It is only mid-July, more records will likely fall in weeks ahead.

At about 5PM on Monday electricity demand in Texas hit a new all-time record of 78,264 MegaWatts. The Energy Reliability Council of Texas (ERCOT) reports there was just over 81,000 MW of generation available. The chart below shows Texas-wide electricity demand for Tuesday, July 13, again just within forecasts and capacity.

In terms of supply, over the last few days in Texas there was lots of sun, less wind, and plentiful natural gas. High heat tends to suppress wind density. On Monday wind was generating less than ten percent of installed capacity. Solar sources were producing at just over 80 percent of installed capacity.

Natural gas and other thermal sources were also delivering more than 80 percent of installed capacity. Texas is not the only source of strong pull for natural gas. According to S&P, “… the largest annual increase in gas demand this season appears to be coming from power generators. In the US Southeast – which includes East Coast states outside of the South Central region, like Florida, Georgia and the Carolina – gas-fired power demand is up nearly 2.5 Bcf/d summer-over-summer to trend at an average 13.8 Bcf/d from June 1 to date.” This strong demand has emerged earlier than usual… Along with a roughly 2.3 Bcf/d increase in LNG exports and a combined 400 MMcf/d increase in residential-commercial and industrial consumption this summer, demand in the Southeast is now outpacing supply at some downstream locations, fueling previously unseen price premiums.”

Supply would be tighter and prices even higher if the Freeport LNG terminal was still operating. More supply is available to Texas and nearby with the United States’ second-largest LNG export facility closed. The United States typically exports roughly 10 to 12 percent of LNG production. With Freeport offline exports are likely to be closer to ten than twelve percent. Good for Houston.

Not so good for Hamburg (or Hokkaido or Hyderabad). As Europe loses Russian flows of natural gas, US LNG is an important gap filler. Summer is when European natural gas domes are refilled for winter draw-downs. Current inventories are uneven, but mostly moving in the right direction at the low end of five year averages. But there is cause for concern that ordinary supplies are about to be reduced, while unusual summer heat increases demand (in Europe too), and alternative sources of supply will be too little, too late.

This is another example of an extreme event (weather) prompting a demand surge (for electricity) that challenges both midstream (grid power) and upstream (natural gas, wind, and solar) production capacity. Where effectual demand (access and money) can be deployed and delivery channels are operating, networks have again and again demonstrated robust and creative abilities to fulfill demand. But this has mostly been achieved through unusually — unsustainably? — high capacity utilization levels.

Extraordinary flows are being generated… and regular maintenance is often abbreviated or delayed… and longer hours are being worked over extended periods… and price-increases cause a whole host of downstream complications… and any sustained loss of almost any fraction of production or delivery capacity can quickly exclude a substantial number of customers.

Abundance and fragility are dancing cheek to cheek.

ERCOT Demand for Tuesday, July 12

+++

July 14 Update: A few hours after what’s above was posted, ERCOT projected that demand would exceed capacity on Wednesday afternoon, July 13. While wind capacity utilization picked up slightly yesterday, both solar and thermal were lower (more and more). Once again, Texans cut back and the lights stayed on. But what if we are looking at ten more weeks of this — with the prospect of a couple of hurricanes too?

July 15 Update: Bloomberg reports, “To meet the surge in power demand, Ercot, the grid operator, is leaning heavily on a mechanism called reliability unit commitments to ensure there’s enough supply. Plants are being regularly ordered to go into service, or remain in operation, and skip any scheduled maintenance. The measure also overrides shutdowns for economic factors or any other issues. And Ercot is using the rule more than ever before as the state battles bout after bout of extreme weather… Maintenance for power plants — especially older ones — can be time consuming and complicated, said Webber, who also serves as chief technology officer of Energy Impact Partners, a clean tech venture fund “You kind of have to dismantle the plant,” he said. “It’s not something you can do in a couple of hours.””

Updating Big US Flows

Posted on by Philip J Palin

Unprecedented 2021 demand prompted unprecedented 2021 US flows… and plenty of related supply chain stress. During the first half of 2022 US demand has stabilized (at close to pre-pandemic trends). Flows are off their peaks and dispersed over more channels. Supply Chain stress is reduced. The United States is, however, still pulling much more push than pre-pandemic.

The west coast Longshore and Warehouse Union contract expired July 1 (more). Work continues while negotiations continue. Just in case (and looking for dock-space and available rail freight) some shipments have shifted to US Atlantic and Gulf coasts. Overall inbound US flows are within 5 to 10 percent of 2021 all-time records.

There has been — still is, in some quarters — concern that China-US flows are constrained by counter-covid measures in China. But overall US imports from China have remained well-above pre-pandemic levels, even as maritime rates (more) have fallen from stratospheric to merely well above “ordinary” (whenever that was).

It is increasingly clear that reduced US demand for many China-sourced goods has coincided with the friction caused by China’s lock-downs (more and more and more). There is still an opportunity for upstream capacity constraints to complicate downstream fulfillment this Christmas, but those yin/yang proportions are unlikely to be clear for another eight to ten weeks.

Meanwhile a strong dollar makes imports cheaper. The US is spending more on imported food than ever before, about one-third more than pre-pandemic. But the US is still more than 80 percent self-sufficient on most foods — and remains the planet’s largest exporter of food-related products.

Domestic and global food flows are troubled by weather related constraints in many places and war-related disruption of Ukraine’s huge grain exports. It is, however, too early to be confident — either way — regarding Northern Hemisphere 2022 harvest conditions. Yesterday’s USDA Crop Progress Report is mixed. AgWeek headlined, “spring wheat improving, slight decline in corn, soybean conditions.” Wheat futures have fallen considerably from their February 28 high — and consistently since early May — but current prices remain much higher than decade-long averages (more). Yet even with recent softening, global food prices have increased farther and faster than US food prices.

The United States is also mostly self-sufficient in energy. Since 2019, for the first time since the 1950s, the US has produced more energy than it consumes. (See the chart below.) The nation still imports about one-fifth of domestic energy consumption, which helps balance demand and supply by securing beneficially priced crude or finished products for specific seasons and regions. In 2021 79 percent of total US energy consumption was supplied by fossil fuels. US refinery capacity is currently very tight and operating at unusually high utilization rates (more and more and more).

Global energy flows are beginning to adjust to disruptions and diversions related to the war in Ukraine and the weaponization of energy supply chains. Discounted Russian fossil fuels are finding customers. European demand is — so far — being fed by new non-Russian and diminished legacy flows (more). Yesterday the WTI benchmark price for oil fell under $100 for the first time since April. (Even as natural gas prices continue to soar.)

In terms of domestic transportation of food, fuel, and more, pipeline capacity has improved. Rail capacity is diminished by congestion (more). The United States currently has more trucks and truckers operating than ever before, but spot market flexibility is starting to be shed under pressure of diesel prices and reduced demand.

It is, of course, much more complicated than this audacious summary. Risks abound. Fresh opportunities beckon. Some consumers are falling off the edge as this is being written, while others are indulging. But right now (early July), right here (continental United States), demand is more doable because there is a bit less of it and because we expanded push capacity trying to fulfill last year’s pull.