Low ocean freight rates aid North American grain exports

CNS — The Baltic Dry Index, which tracks global ocean shipping rates, is currently trading at its weakest levels of the past year. The declining cost of ocean freight makes North American grain and oilseed exports more competitive into international markets.

The Baltic Dry Index (BDI) was quoted at 755 points on July 16, which compares with levels above 900 to start the month and over 2,000 in January, 2014. The BDI is compiled daily by the London-based Baltic Exchange and provides an assessment of the price of moving major raw materials by sea.

Lower freight makes North American grains more affordable to international buyers, said Jay O’Neil, senior agricultural economist with the International Grains Program at Kansas State University. With commodity prices also cheaper right now, North American grains are more competitive and more affordable to world buyers “so we are experiencing an uptick in export demand.”

“Daily hire rates are very low, no matter where you’re shipping from,” he added.

As an example, a Panamax vessel (55,000-tonne capacity) moving grain from the West Coast to China currently runs at about US$23 to US$24 per tonne, which compares with highs of about US$30 earlier in the year, according to USDA data. O’Neil said current rates compare with the average of about US$28 to US$30 per tonne seen in 2003 to 2007, and well off the highs of 2008 around US$125 per tonne.

The low ocean freight rates are tied to the fact that vessel owners added to the fleet when rates were high and they are now faced with an oversupply of freight as demand did not rise at the same rate, said O’Neil.

“We have too many ships, which is the simple bottom line,” said O’Neil. He noted that many ships were being forced to operate at fuel costs alone.

That scenario can’t last forever, and now the cargo sector is waiting for the demand to catch up with the fleet size. While there are some industry participants predicting an increase in shipping rates in the latter half of 2014, O’Neil expected the turnaround would not begin until 2015. There has already been a reduction in new ships being built, and cargo demand is slowly increasing, but he said the eventual price increases will be gradual when they start.

 

Phil Franz-Warkentin writes for  Commodity News Service Canada, a Winnipeg-based commodity reporting service.

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