Grain shippers say soaring ocean freight rates are delaying purchases, shifting demand and gouging margins, and they could stay high for a few more years.
With its strengthening economy China is importing huge amounts of raw materials like iron ore, coal and soybeans and exporting loads of manufactured goods. That growing demand for ocean vessels is pushing up freight rates.
According to the International Grains Council, shipping costs for corn, soybeans and wheat have doubled and in some cases tripled between November 2002 and November 2003. Here are a few examples in U.S. dollars:
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- Shipping rates from the Gulf of Mexico to Japan have climbed to $44 a tonne from $24.25.
- Pacific Northwest to Japan has risen to $38 a tonne from $11.75.
- St. Lawrence, Canada to Algeria has climbed to $35 a tonne from $18.
Rates had been low for three years and some industries properly hedged themselves against the eventuality that they would some day rise. Others didn’t.
“In agriculture we were perhaps caught a little bit flat-footed,” said Marlene Boersch, a special crops analyst and partner in the Winnipeg firm Mercantile Consulting Venture.
She said the industry failed to recognize the trend and was caught in an uncovered position. Pulse buyers are now seeing “steeply increased” landed value for Canadian product compared to last year, while farmers feel they are getting less for their crops.
“The farmer says, ‘I think there is room to move up,’ and the buyer says, ‘there is room to move,’ ” said Boersch.
These strongly held beliefs have contributed to a situation where exports are materializing slower than usual.
Canadian Wheat Board market analyst Peter Watts said the demand for wheat and barley is still there, but it is being pushed around by freight spreads that have made Canadian product less competitive in some traditional markets and more competitive in others.
Rising freight costs are also encouraging buyers to fill nearby demand and delay longer-term purchases. Many wheat and barley importers are covered only into January or early February, anticipating that rates will soon fall.
“It adds to the hand-to-mouth purchasing environment that has been prevalent in the world grain market over the last five years,” said Watts.
Canola Council of Canada president Barb Isman said product movement has been terrific so far this year, but margins are taking a hit from higher freight bills.
Japanese crushers have not been willing or able to increase the price of canola oil, so the freight hike is eating into their profits and that is being passed all the way back to Western Canada.
“At some point that has to get factored back to the consumer and I don’t think all the adjustments have been made yet,” she said.
Boersch expects higher freight rates could be around for as long as two or three years because that’s how long it takes to build a new vessel.
“You can’t just increase the capacity from one month to the next,” she said.
Over the past three years the shipping industry has downsized its fleet.
“The old vessels were taken out of traffic. They weren’t kept up or renewed and now they’re gone.”
Watts doesn’t buy that line of thinking.
“A couple of years seems like a long time to me. But I don’t think it’s going to go away in the next two or three months.”
He said shippers will find vessels somewhere.
“With these kind of freight rates you’re going to see lots of people gearing up to get as many boats in operations as they can.”
Watts expects rates to start dropping in the spring.
