Depending on whom you ask, dirt cheap ocean freight rates have either dramatically skewed grain trading patterns or have had no impact.
With rates at 22 year lows, the Canadian Wheat Board said it is facing competition from unlikely sources in some markets and finding itself in uncharted territory.
“To go from an environment where (ocean freight) was prohibitively expensive to an era where it is dirt cheap creates some changes,” said Bruce Burnett, the wheat board’s director of weather and crop surveillance.
Freight rates have fallen to about 20 percent of what they were at their peak. A shipment of wheat from Vancouver to Japan or China is less than $20 per tonne compared to highs of about $100 in spring.
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Burnett has heard ocean shipping lines are barely covering their fuel and crew costs.
That cheap shipping environment has allowed the board to be more competitive in markets such as the Middle East, where the agency wouldn’t have considered venturing a year ago.
However, there is a flipside.
“I put this under the heading of be careful what you wish for because sometimes you might get it,” Burnett said.
Feed wheat from Europe and the Black Sea region is finding its way into markets in Southeast Asia, Latin America and U.S. hog markets.
“If we had a large feed wheat crop this year that would be a big concern,” Burnett said.
Lach Coburn, west coast manager for Cargill Ltd., doesn’t believe freight rates influence customer behaviour.
“I don’t think we moved any more or less grain when the (freight) market went up, nor will we move any more or less grain where the market is today,” he said.
Buyers pay attention to crop prices, which make up a much larger percentage of the landed price of commodities. However, even with those prices tumbling, he said, importers are still buying on a hand-to-mouth basis because of global economic uncertainty.
Burnett agreed that grain prices are behind a lot of today’s shifting trade patterns. Feed wheat is attractive now because there is so much of it on the market.
“The record wheat crop is starting to edge in and muscle out corn demand,” Burnett said.
In its Dec. 11 World Agricultural Supply and Demand Estimate, the U.S. Department of Agriculture dropped its U.S. corn export forecast by 2.54 million tonnes, a reflection of the competition the crop is facing from low-priced wheat around the world.
However, plummeting freight rates are exacerbating what’s happening with grain prices, leading to vastly reduced landed prices for agricultural commodities.
That is where lower freight rates have truly benefited farmers, Burnett said, solidifying demand at a time of economic uncertainty.
Of course, freight rates will eventually rise. Shipping lines can’t continue to operate in an environment where they are not covering all their costs.
“We’re at the lows now and we’ll probably see the rates move higher at some point here in the next half year to a year,” he said.
However, he thinks a return to sky-high rates is improbable over the next 12 to 18 months.
