In These New Times

Plunging shipping costs send grains globetrotting
By Lisa Shumaker
Reuters iht
Monday, December 8, 2008
CHICAGO: Ocean shipping costs have plunged to 22-year lows, skewing global grain-trading patterns to the point where hog farmers in the United States are importing wheat from Britain and Japan has shunned American corn in favor of supplies from Ukraine.

In some countries, it is now less costly to ship grain thousands of kilometers across the ocean rather than move supplies hundreds of kilometers by barge or railroad cars. But the phenomenon should be short-lived and the United States should remain the world’s top exporter of corn, wheat and soybeans, according to specialists in the sector.

“It has opened up opportunities that perhaps wouldn’t have been conceivable before and one-off trades may well happen, but it is not really changing the grain flows,” said David Doyle, head of wheat at Openfield, a farmers’ cooperative in England.

Ocean freight rates reached a record high in May and have since fallen more than 90 percent in a few months to as little as $10 a ton to most destinations.

“Ocean shipping costs are so low that it would be cheaper for south Indian buyers to import Russian wheat than move wheat from north India by train,” said one European trader who was not authorized to speak to the news media.

The consensus is that the current low freight rates will not last beyond the next 12 months. Prices will have to rise for shipping companies to remain in business and trading patterns will return to normal.

“It’s the anomaly of the excess supply of grain available and the low freight,” said John Kruse, managing director at Global Insight. “The U.S. is usually the most cost-effective producer of corn. I see it more as a temporary phenomenon versus a major shift in trading patterns.”

Collapsing ocean shipping costs have leveled the playing field for wheat exporters, which now compete solely on the price of the grain.

Russia and Ukraine have been able to make sales far beyond their traditional markets in Europe and the Middle East, reaching out to Asia, European traders said.

In a recent and closely followed international tender for wheat shipped to Egypt, U.S. wheat freight was $11 per ton, an insignificant difference from Russian freight at $12. French and German wheat were also offered at $11-$12 per ton to Egypt.

“Ship owners are giving away bulk carriers at operating costs just to generate cash flow and to pay crews’ wages,” said another European trader who was also not authorized to speak to the news media. “This will expand the selling range of U.S., Argentine and Australian wheat in the Middle East market if they can compete against the Russians on prices.”

Though the export season in the Black Sea region is quickly closing, the low freight rates will allow countries like Argentina and Australia to be more competitive. “It is happening all because of the freight rates,” Vijay Iyengar, managing director of Agrocorp International, grain trader in Singapore. “I think it will go on for a longer period as the freight market doesn’t show any signs of improving.”