Farmers are usually thrilled by news of surging commodity prices, but not when it is a commodity that works against them.
Ocean freight rates are once again on the rise. They haven’t hit the highs of 2004, but they are almost double what they were the last time farmers harvested a crop.
The Baltic Dry Index, a measure of dry bulk shipping rates, is nearly 90 percent above where it was at the same time last year.
Rate increases will vary by commodity, depending on the type of ship or route used, but the index provides a general barometer of what has happened to shipping costs.
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Analysts thought freight rates were levelling off but in recent months there has been a surge in global demand for ships, which has driven up exporting costs.
Neil Townsend, market analyst for the Canadian Wheat Board, said the cost of shipping wheat from Canada to Japan through the Port of Vancouver is $37 per tonne, up 60 percent from the $23 per tonne the board was paying last August.
It’s the same story for freight on feed barley exports to Saudi Arabia, which is running around $48-$50 per tonne, up from $30-$32 one year ago.
The Saudis want to pay a landed price of $150 per tonne for the barley but the best price the board can offer is around $170 per tonne, so that business will likely go to suppliers in the Black Sea region.
Townsend said that is a prime example of what tends to happen when the cost of shipping grain is as robust as it is now.
“Some place that before enjoyed a $5 freight rate advantage to us in the current climate might have a $10-$15 freight advantage.”
To become more competitive, shippers of bulk commodities might have to roll back the prices they pay to their suppliers.
“In terms of returns to farmers, at times it can have a little bit of an impact,” said Townsend.
That is especially true for a commodity like barley, which is primarily sold on a delivered basis, where freight is factored into the end price. Wheat, on the other hand, tends to be sold on a free-on-board basis, where the customer provides its own transportation and pays a commodity exchange-based price.
Townsend said while rising ocean freight rates may lead to lower farmgate prices for some commodities and a shuffling of export destinations for others, little overall business will be lost because grain buyers have limited substitution options.
He doesn’t expect to see the same kind of run-up in prices that happened in 2004, where the Baltic Dry Index peaked at 6,200 points. He expects the index to come off slightly from the current level of 3,700 points barring any unforeseen events, because there are more ships on the seas and modern ports are set to open in the Asia Pacific region.
Trevor Lavender, partner with Summit Maritime Corp., a Montreal freight broker, expects freight rates to level off for the next nine to 12 months after a three-year period he termed “the mother of all run-ups.”
“I think it’s just going to stay firm. This cannot keep going up.”
Lavender has never seen such sustained upward pressure on freight prices in the 30 years he has been in the business.
“You can get a freight rate indicated to you yesterday which is no longer valid this morning.”
He knows of one 160,000 tonne vessel used for hauling iron ore that was recently rented out for five years at a rate of $29,000 US per day. The same day it was flipped to someone else for three years at $37,000 per day. A week later that same person rented the boat out for three years at $41,000 per day.
“It’s really crazy,” said Lavender.
Rates that eased off in 2005 are on the rise again due to bulk cement moving to the U.S. for hurricane rebuilding efforts and for iron ore, steel and coal moving to China to fuel that booming economy, which is preparing to host the 2008 Olympics in Beijing.
“China is constructing the equivalent of a Manhattan every year for the last couple of years,” he said.
Lavender estimates grain shipping rates off the West Coast are up 60-80 percent over the past 18 months.
He noted that grain commodities haven’t risen in the same manner, which means freight costs are a much higher percentage of the landed price than they used to be.
“Freight becomes critical to put a deal together,” he said.
