Grain exporters to feel more price pain as shipping rates rise
An improved outlook for global bulk shipping rates spells bad news for grain exporters as they go into the latest sales campaign, with increased freight costs squeezing profit margins and adding to price competition in leading markets.
U.S wheat exporters look to be the hardest hit as ship owners prepare to crank up rates, expecting a clamor for their vessels. The biggest hike may be to the major Middle Eastern market - giving smaller producers, situated nearer the region, a price edge.
"When it comes to the grain season ex U.S. we believe this will be a strong season and we believe the same will be the case with the season ex Black Sea," said Jens Ismar, chief executive of shipping group Western Bulk.
"This, combined with the fact that the world is still increasing its demand for raw materials, make us share the view of almost all analysts predicting a stronger market in the second half of this year."
While freight players look to mark up rates, many grain exporters expect their profits to be hurt - especially as U.S. wheat sales are increasingly challenged by cheaper supplies from western Europe, Ukraine, Russia and Black Sea countries like Romania.
"A rally in freight rates would be detrimental to the chances of U.S., Australian and Argentine wheat in Middle Eastern markets. Russian wheat would probably be the winner," a European grain trade source said.
Another European trade source said U.S. soft red winter wheat, on a free-on-board basis, was currently $6 a tonne cheaper than Russian and Ukrainian wheat and $5 a tonne cheaper than Western Europe origins.
"A rise in freight rates would remove this competitive advantage," the second trade source said.
The rise may feel more painful, coming after a slump in freight rates due to poor demand from a weak world coal market, idling ships.
Average daily earnings for panamax-sized ships, each capable of carrying 60,000 to 70,000 tonnes of grain, slid to one-year lows around $3,000 a day in recent weeks.
But analysts and ship owners expect rates to rebound going into the peak export season towards October.
"(Panamax) rates have virtually halved over the last month and a half. Definitely, going into 2H 2014 there is room for improvement and they will improve," said Natasha Boyden at U.S. investment banking firm MLV & Co.
Analysts expect panamax average earnings to rise towards the $8,000 to $10,000 a day level by October, around the same time that South America's grain exports are expected to gather pace.
The main sea freight index at London's Baltic Exchange is also predicted by analysts to rise 10 percent in the second half of 2014 from the first half. It is currently under 900 - its lowest level in over a year.
- TekWear partners up on new crop monitoring technologies
- Harvest delays impact crop performance, study shows
- Hogs were the exception to the bullish rule Thursday
- Sugarcane aphids found in North Carolina
- Online registration open for Dec. 15-16 AGMasters conference
- Export data, equity gains boost crop futures Thursday morning
- How much corn can the ethanol industry use?
- Economist: Taxing P could reduce risk of algal blooms
- Commentary: Government wants farmers to quit farming
- Ag markets made a generally mixed showing Thursday night
- What is the relationship between maturity group, yield?
- Commentary: Ambulance-chaser lawyers take on Syngenta