As we cross the halfway point of the year, this is my update From The Fields as I fly to visit our partners. Always, I address the hot button issues and give my best advice for managing them as you look forward. The price of almost all Chinese herbs are up this year due to a variety of factors. On the low end, prices are up 10-15% and at the other extreme, prices are up 300-400%.
I suggest reaching out to your herbal partners to better understand how this will impact your company going forward. This is especially important if you have contract pricing expiring as previously made commitments have been fulfilled and you haven’t experienced the price increases to date. The four most important factors in the increase of prices are:
- Cash flow
- and Inflation
There is good news that some of the increases are offset by a stronger dollar and reduction of sea or air freight costs. We won’t discuss inflation because I am sure that you feel it daily and read all about it everywhere, just know that most of the non-herbal inputs have increased in price as well.
Two major herb producing provinces in China, Gansu and Sichuan, experienced extremely dry weather followed by rains that caused flooding. This resulted in an extremely poor harvest for herbs grown in those provinces.
And there was an earthquake in Sichuan during the wild harvest season which created dangerous conditions for wildcrafters, which affected supplies. Some of the herbs that are impacted are Dang Gui (Angelica Sinensis), Huang Qi (Astragalus membranaceus), and Chai Hu (Bupleurum chinense).
Labor is another issue driving price increases. I don’t think this is uniquely a China issue as we are seeing this trend in other countries with an aging population. Yes, the cost of labor is increasing in China, but more importantly, the efficiency is decreasing.
Why is that more important? It’s because that as people retire, die, slow down, and leave our sector, the replacement rate is below a 1-to-1, and they aren’t skilled. One may think that the “know how” to grow and process herbs may not be high, but in Chinese herbs where a lot of processing is required, the bar is high.
A lot of “know-how” was lost during COVID due to deaths or people leaving the city, whether they were tier 1 cities like Shanghai or smaller cities. Some of those that left never returned and some of those that returned have moved onto other jobs, making processing the herbs slower and leading to higher loss upon processing due to fewer skilled workers.
Another factor is COVID disproportionately impacted the elderly in China; they were the primary wildcrafting labor force, thus a decline in yield and increase in price. These forces seen in China have impacted other countries with aging populations, like France, as well.
The two forces are the primary driver for price increases at the lower end of the spectrum, while money flow is driving price increases at the upper end. With the Chinese property and financial sectors puttering along, a lot of money has flowed into the herbal markets because the new money thinks that it can control and manipulate prices for certain herbs, then sell at a much higher rate because they have cornered the market.
With this influx of capital, we are seeing prices for some herbs that don’t make sense. If the farmgate price for Suan Zao Ren (Suan Zao Den) is roughly $185/kg before processing and when other costs are factored in, how can any brand afford to use it?
Some brands in China have either discontinued production of certain formulas or slowed it down to a trickle because they are losing money on every unit made due to price increases of the herbs used in their products.
I know what you are thinking - “Does Wilson ever have good news?”
Here is the bright side: the logistic portion of the supply chain has pretty much normalized (unless UPS goes on strike). If the herbs you are using are on the lower end of the price spectrum, the increases may be mostly offset by normalization of container rates, especially if the herb is a flower or aerial part.
For example, when a 20-foot container was at the US $7-8,000 rate, for a 20-foot container that could hold 8 tons of flowers, the freight was $.88-$1 a kg, plus all the inflated prices to get it to and from port. Now with a 20-container under $2,000 then the freight cost would be 0.14 cents/kg or less.
However, if freight isn’t a big portion of the price, then its impact will be rather muted. For example, our sour jujube wouldn’t even have a rounding error in price. Another factor that will temper some of these price increases is the strength of the dollar. Its exchange rate has moved last year from $1 Dollar to ¥6.6 Yuan to roughly $1 Dollar to ¥7 Yuan. This represents roughly a 5-6% decrease for items denominated in yuan.
Final Thoughts and Advice
One last word of advice is to work with your trade associations, like the American Herbal Products Association (AHPA). If they successfully put pressure on the US government to lift the tariffs on agricultural goods from China where there is no commercial crop in the US, which is almost all Chinese herbs, that would offset prices by the 25% tariff that we currently pay on herbs. Speaking of AHPA, I want to congratulate them on the release of the third edition of the Herbs of Commerce. If you haven’t gotten your copy, I would highly encourage you to get the new edition. It’s an invaluable tool for anyone working in the herbal industry. If you have any questions or requirements for Chinese herbs, you can schedule a time to chat with me here.
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