High ocean freight rates have mellowed in the last few months, creating calmer seas for grain shippers, but analysts feel it is a temporary reprieve.
According to the Baltic Dry Index, freight rates have fallen 50 percent from their peak in the winter of 2004, reflecting a slumping demand for iron ore out of China and an increase in the number of ships working the high seas.
However, Saskatchewan Wheat Pool senior pea merchandiser Shaun Wildman said the index number is a paper decline. When it comes to actually booking vessels, the drop is more in the range of 25 percent out of Vancouver.
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Either way, it is a much-needed cost break happening at a time when Canada still has plenty of non-board grain to move from the 2004-05 crop.
“This is allowing us to do some business that we have to do,” Wildman said.
In addition to kick-starting grain sales, falling ocean freight rates have firmed up commodity prices.
“Feed peas are as high as they’ve been all crop year and I think that is a result of this depreciation in freight,” Wildman said.
However, he cautioned growers not to get too excited about the price-inflating potential of lower freight rates. Even with the big drop, the rates are still 60 percent higher than they were two years ago.
And it appears as though the 2005 rates are closely tracking 2004 patterns, which means the reduction could be short-lived.
“This is very similar to what happened last year; the market rallied in the winter, dropped off very significantly in the summer and then it went back up.”
Wildman expects rates to bottom out in July and then head back up. Vessel owners are seeking huge premiums for shipments booked into September and October.
Derek Sliworsky, Asia-Pacific marketing manager for the Canadian Wheat Board, also considers this a short-term lull in ocean freight rates, although a dramatic one.
The daily cost of renting a 50,000-tonne vessel has fallen 50 percent to $15,000-$18,000 from last year’s peak range of $30,000-$35,000.
A large Panamex ship going to Malaysia now costs the board $30 per tonne for a July position compared to last year’s peak rate of $50 a tonne.
Unfortunately, the drop in rates is occurring when the board has already moved a lot of its grain.
“I don’t know if we can take full advantage of the market declines because we’re getting into the late stages (of the 2004-05 crop year). Supplies are tightening up,” Sliworsky said.
The benefits of lower freight rates have been mitigated by the abnormally large supply of poor quality wheat from last year’s harvest.
In a typical year, Canada would compete with Australia in quality wheat markets such as Southeast Asia, where Canada is at a serious freight disadvantage. Sailing time to that region is 25-30 days compared to 10-15 days out of Australia.
A significant drop in freight rates would make Canadian wheat more competitive with Australian product.
But this year Canada is more concerned about feed wheat from places such as Argentina, China and the Black Sea region, where the competitive dynamics are different.
China has such a huge freight advantage into places like South Korea and the Philippines that it matters little what happens to rates.
When it comes to Ukraine and Russia, Canada is the one with the shipping advantage, so falling rates actually make Canadian wheat less competitive versus Black Sea wheat.
“It’s not a quick and easy equation to say low freight rates are necessarily a good thing,” Sliworsky said.
