Tracking the ups and downs of the highly volatile ocean freight market is enough to make a grain exporter seasick. Especially when freight rates hit a record high, as they did last week.
The London-based Baltic dry freight index, which tracks ocean freight rates for commodities like grain, iron ore and coal, reached a record 11,067 May 15. The old record of 11,039 was set in November 2007.
In between those two peaks, the index dipped as low as 5,600 in January 2008.
In terms of dollars and cents, the rate for grain shipped from U.S. Gulf ports to Japan has increased from $96 a tonne in late January to $140 a tonne last week, a rise of 45 percent.
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Rising ocean freight rates worsen Canada’s competitive position in certain markets.
For example, Australia has a freight advantage into Asia, and Black Sea barley exporters have an advantage into Saudi Arabia. Those advantages increase as rates go up.
However, David Przednowek, the Canadian Wheat Board’s senior manager for ocean freight, said that alone wouldn’t be enough to force the board to abandon specific markets.
U.S. grain industry officials say rising ocean freight has caused a reduction in grain vessel loading and new sales in recent weeks.
Reuters News Agency quoted one grain trader as saying: “I’ve got customers who want to delay shipment of grain they’re already bought because they have enough and the freight is killing them.”
For grain moving from the U.S. Pacific Northwest to south Asia, the rate has climbed from $50 a tonne in January to $74 a tonne last week, an increase of 48 percent.
Daily hire rates for ocean vessels are in the range of $110,000 a day.
Those higher costs will inevitably be passed down the supply chain to the backs of producers.
Jay O’Neil, a transportation analyst from Overland Park, Kansas, said the sharp increase has come as a surprise.
“Most players in the market believed we would not see a repeat of the historically high rates experienced (last fall), but here we are topping those now,” he said in a May 16 market commentary.
“And no one seems to have a good answer as to exactly how prices got to this level or how much further they can go.”
O’Neil cited strong demand from China for iron ore, transit delays at the Panama Canal, the South American grain harvest moving to market and chaos arising from a strike by farmers in Argentina as reasons for the increase.
“The market seems to have a fair amount of psychological or fear element in it, too,” he said.
Przednowek said it all boils down to supply and demand.
“It’s fundamentals and it’s largely driven by iron ore,” he said.
China is importing massive amounts of iron ore, setting monthly import records, and the recent earthquake in that country could also stimulate demand for coal to meet increased energy needs.
That demand is creating serious congestion at iron ore and coal loading ports around the world, said Przednowek, adding more upward pressure on the market.
Iron ore and coal each account for about 33 percent of the global trade in bulk dry products, with grain a distant third at 10 percent.
New ship building that would ease the market squeeze is being hampered by rising construction costs, financing difficulties and shortages of parts and crews.
Also, investment funds have been moving in and out of the freight market, trading what are called forward freight agreements and affecting prices similar to what has happened in grain markets in recent times.
