Apr 7, 2007

Rising Fuel Prices Squeezing West Coast Shippers

Rising fuel prices have been affecting produce shippers all over the country, especially those on the West Coast.

According to a report recently released by the Washington state attorney general’s office, the West Coast “is a unique market in the United States in terms of supply, demand and production of gasoline. As a result, the average price of gasoline is higher than other areas of the country.”

According to the U.S. Energy Information Administration, the West Coast retail on-highway diesel price for Oct. 31 was $2.95 per gallon, 8 cents more than the U.S. price, $2.87.

“We’re getting squeezed,” said Stanley Corriea, owner of Stanley Produce Co. in San Francisco. “It’s a tough nut to crack right now.”

Gasoline prices are generally higher on the West Coast because decreasing refinery capacity and limited pipeline capability have restricted supply, while dramatic population increases have stimulated demand. During the past decade, the national population has grown by 4.5 percent, but in Washington the population has increased 21 percent. Oregon has grown by 20 percent and California’s population has increased 14 percent, according to the Washington state report.

“Unfortunately, there are few prospects for increasing refinery capacity on the West Coast in the near future,” according to the report. “Unless existing refineries can be expanded or upgraded to make up for losses in production, and as long as demand for gasoline remains strong, prices are likely to remain high.”

Shippers are dealing with the situation as best they can, usually by passing price increases on to their customers.

In the last few months, fuel surcharges have gone up 10 percent, said Bill Daniel, transportation manager for Henningsen Cold Storage, Hillsboro, Ore.

To deal with rising costs, Henningsen has raised rates for its customers, which include grocery distributors and manufacturers. Henningsen hires trucks to ship frozen and refrigerated food across the country, including frozen vegetables.

Fuel prices haven’t been the only problem. Competition for a limited supply of trucks and drivers has put shippers like Henningsen at a disadvantage, Daniel said.

“It’s a carrier’s market rather than a customer market,” he said. “We negotiate with carriers to get the best possible rates. We’re pretty much at their mercy.”

Erratic weather hasn’t helped the situation. Gasoline has gone up about a dollar a gallon since Hurricane Katrina, he said.

“We’re hoping next year it will get better, but it depends on how the weather does,” he said. “If we have another hurricane season, who knows?”

Cutting back shipments, even to the far-away East Coast, is not an option, Daniel said.

Companies that ship locally also are feeling the squeeze. Inland Cold Storage (ICS), Riverside, Calif., receives chilled and frozen produce from customers and distributes it to stores in Southern California, said Tim Swank, general manager of the company’s in-house transportation arm.

Several months ago, ICS was not paying surcharges to its local, contracted drivers. It’s now paying them surcharges of 14 percent to 16 percent, Swank said.

“I can remember when surcharges were 1 or 2 percent,” he said. “It’s gotten out of control. A lot of my smaller carriers have gone out of business.”

In May, California’s average diesel cost was $2.36 per gallon. On Oct. 3, it was $3.26 per gallon, an increase of almost a dollar. Part of the problem is that California has tight restrictions on fuel, Swank said.

“Higher prices have forced companies to raise surcharges,” he said. “The bottom line is, the end consumer will have to pay the fuel surcharge.”

Stanley Produce Co. has been feeling the pinch. The company’s delivery vehicles ship produce daily around the San Francisco area. Increasing freight rates and surcharges make it difficult to recoup costs and remain competitive, said owner Stanley Corriea.

Things aren’t much better a little further east. Fuel surcharges have increased for Idaho’s fresh-pack potato shippers, causing them to raise prices on their customers, said David Smith, president of the Idaho Grower Shippers Association.

“Everybody has fuel cost issues,” he said. “It all adds to the total cost of the product.”

Smith’s association represents Idaho’s fresh-pack potato shippers, who pack and ship potatoes all over the country by truck and rail, he said.

High fuel prices have driven more growers to railroads.

“For the last couple of years, we’ve seen tremendous growth in our perishables business,” said Suann Lundsberg, spokesperson for BNSF Railway. “We’re seeing more trucking companies use rail for the long haul.”

BNSF, based in Fort Worth, Texas, ships product like frozen french fries from the West Coast to the Mississippi River.

“Railroads are three times more fuel efficient than trucks,” she said. “If 10 percent of the freight were moved to rail, the nation could save as much as 200 million gallons of fuel each year.”