Canadian grain farmers will continue benefiting from cheap ocean freight rates well into the foreseeable future, say two freight experts.
Rates have plummeted from the record highs of 2008, and there are no signs of an immediate rebound.
“The lower the freight prices the better because on average, compared to our competitors, we have to pay more to ship grain to destination,” said David Przednowek, manager of Canadian Wheat Board marine logistics.
A good barometer of freight rates is the cost of shipping grain from the Gulf of Mexico to Asian markets on a Panamax vessel, which can carry 55,000 tonnes of product.
Read Also
China’s grain imports have slumped big-time
China purchased just over 20 million tonnes of wheat, corn, barley and sorghum last year, that is well below the 60 million tonnes purchased in 2021-22.
Those rates are $52 US per tonne, which is well below the high of $145 per tonne reached in 2008 when the global economy was super-heated.
Jay O’Neil, a senior agricultural economist with Kansas State University’s International Grains Program, said demand for ocean freight spun out of control in 2008, driving up the cost of moving North American grain to market and sparking ship building.
“Everybody went to double the size of their fleets and people who weren’t even in the business wanted to get in.”
Ship builders were suddenly confronted with a three-year backlog of orders, which started hitting the high seas in 2010 and will continue to be filled through 2012.
“Now that they are being delivered they’re swamping, they’re overwhelming the demand,” said O’Neil.
The world fleet has grown by 17 percent a year in the last two years, but shipping demand has grown by only eight or nine percent. The oversupply is pressuring prices down.
“Ocean freight owners would tell you that these types of rates in their minds are pretty darn low and they’re not happy with it,” said O’Neil.
There is no indication that the situation will change soon. It costs $9,000 a day to hire a small ship to carry 25,000 tonnes of cargo, which is down from $12,000 a day at the end of March. Large ships have the same rate.
“You can tell the market is depressed when the daily hire rate for the big boats is very similar to the small boats,” said Przednowek.
Freight futures markets indicate prices will remain lax over the next couple of years as more ships hit the market.
“This year and next year we’ll see a very heavy delivery of new vessels into the trade,” said Przednowek.
Low rates will help ensure Canadian durum stays competitive with French and Spanish durum into North Africa, Canadian wheat can compete with Australian wheat in Southeast Asia and Canadian barley can take on Black Sea barley in the Middle East.
O’Neil said lower rates usually help North American grain growers, but Black Sea wheat and feed wheat prices will adjust to wherever they need to be to remain competitive.
Analysts say freight rates will eventually increase as fleet owners accelerate the scrapping of older ships or temporarily take some of the newer vessels out of service.
“Some owners are getting to the point now where they might decide to park some of those assets and idle them,” Przednowek said. “That will take supply off the market and help push rates up.”
O’Neil said that needs to happen because owners are not generating adequate returns on their newly commissioned vessels. He expects ships will go into layup if rates drop another $5 per tonne.
Przednowek said the Chinese economy is also an important factor. It has propped up demand for ocean freight with its continued need for iron ore and coal. Inflation fighting measures in that country could reduce demand for ocean freight, placing further downward pressure on prices.
