Ever see a whole bunch of cycles go out of whack all at the same time?
Here’s a pic:
This happens in the world’s economies and markets all the time.
It’s happening right now in the world shipping market, as its wacky time-lags cause it to be completely out of whack with the rest of the world economy.
The time between a new oceangoing cargo ship is two to four years. That’s a long time. Especially when investment is being made upon temporary market situations that appeared to be long-term.
Look at this chart. To a shipowner, it’s scarier than the sight of a giant iceberg looming off the port bow, or Moby Dick surging towards the starboard bow.
That shows bulk ocean freight rates not only being below they were since 2003 – when the world was crawling out of the last recession – but also almost as low as the bottom of the market in the 2008-09 collapse.
That’s not a bunch of fun if you have borrowed tens or hundreds of millions of dollars to build new ships, as many did in 2006-08 when people believed there would be booming commodity demand for the forseeable future.
As it turned out, the market crashed and world trade slumped. As the world went into a tailspin, factories closed, people got laid off and many businesses and industries adjusted their outlooks and slashed back their expansion plans. But people who had ordered and paid-for new ocean vessels were on the hook, and construction went forward. Even with these extremely low ocean freight rates, dozens of giant vessels are launched every month as orders made in 2007 and 2008 are completed. That depresses ocean freight prices for years.
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The shipping industry is a victim of the very long cycles of construction and adjustment that are in its nature. Farmers know something about that, because they’re often a few months out of kilter with market conditions, considering they have to seed their crops or breed their cows and sows in a certain market outlook, but harvest their crops half a year later. Often things change radically.
A number of economists and analysts I have recently spoken to have pointed out that fact when urging caution against today’s high prices. They have noted that non-ag investors in ag commodities often don’t understand the typical lagged production response of farmers to market signals, so they don’t realize just how profoundly farmers can boost or slash production based on seeding-time outlooks.
During the winter, regardless of the outlook, farmers in the Northern Hemisphere can do nothing to adjust to it. During seeding, they do it all at once. And then a few weeks or months later, the market wakes up to how they have adjusted.
For non-specialists, the dynamics of farmer behavior are not well-understood, so they often get it wrong, various analysts have told me. That makes prices yo-yo around even more alarmingly than the underlying craziness of weather justifies.
For any farmer that has seeded or bred in one set of market conditions, and then seen market conditions shift radically, the situation of shipowners must be familiar. And perhaps farmers could look at that BDI chart above and ruefully say: Been there, done that, too many times.
