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Record ocean freight slows global demand for grain

Record ocean freight slows global demand for grain
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First Published: Fri, Nov 02 2007. 02 32 PM IST
Updated: Fri, Nov 02 2007. 02 32 PM IST
Chicago: Record ocean freight has slowed demand for grains and is contributing to spiraling food prices around the globe, with both freight and commodity prices forecast to continue rising through the end of the year.
Freight rates to ship corn, soybeans and wheat from the US, Europe and South America have doubled, and in some cases tripled, from a year ago. And buyers have also been hit with a 75% rise in wheat prices and 10-year highs in corn prices.
“The rise in freight costs has come at the worst possible time for importers who also have to grapple with current high grain prices,” said a trader in Europe. “About the only option available to cut ocean shipping costs is to ship over a shorter distance.”
Freight rates to remain high
Freight rates are being driven higher by the expanding economies of China and India. Both import large amounts of iron ore, cement and coal and export steel and finished goods. Prices have also soared because of congestion at Australian ports where coal is exported.
China is spending billions of dollars on its infrastructure in preparation for the Beijing Olympics next year and annual economic growth forecast at 10%. India is not far behind with growth at 8%.
The Baltic Exchange’s dry freight index, which measures the strength of seaborne trade for dry commodities, has been setting new records daily for more than 10 weeks and is likely to keep climbing through the end of the year due to seasonal demand trends, with the occasional decline.
On Wednesday (31 October), the index suffered its biggest one-day loss of the year in a sharp correction.
The record high ocean freight caused US corn and wheat export sales to tumble to a marketing-year low for the last week in October. The US is the world’s largest exporter of both grains.
Rates from the Gulf of Mexico to Japan climbed to $120 per tonne, up from $50 at the start of the year. However, freight rates were already easing to about $110 and buyers were expected to book more grain.
“Food isn’t something you can do without,” said a US trader. “You can only delay purchases for so long before people start going hungry.”
Food prices to keep rising
The record freight and cost of grain has sparked protests over pasta prices in Italy and forced companies around the world to hike prices. Russian food retail chains have agreed to freeze prices on basic foodstuffs to rein in rising inflation, and Moscow may cut import tariffs on vegetable oil.
Japan’s largest maker of instant noodles raised prices for the first time in 17 years.
Even US consumers have felt the impact with food prices rising 4% this year, the largest increase since 1990, according to the US Agriculture Department.
“I don’t see this as a seasonal problem,” said a broker in in Sao Paulo, in Brazil, the world’s largest producer and exporter of sugar, coffee, beef and orange juice, and a major soybean and corn exporter as well.
“We will have to live with this for a prolonged period,” the broker said. “We’re simply going to have to wait for more ships to hit the seas.”
With corn and wheat in tight supply around the world, the US is among a handful of countries with large quantities available for export.
US wheat export sales are more than double sales a year ago and corn commitments are up 45%, according to data from the US Agriculture Department. Only near the end of October did high freight rates put the brakes on sales, traders said.
Grain supplies are also likely to remain tight through the end of the year.
Australia will not have a new crop of wheat to export until January and drought has slashed its crop by half. Canada is sold out until 2008, and Argentina has yet to lift a moratorium on registering wheat and corn for export and might increase export taxes. Russia is now talking about restricting grain exports if world prices continue to rise.
(Additional reporting by Reese Ewing in Sao Paulo, Michael Hogan in Hamburg, Roberta Rampton in Winnipeg and Helen Popper in Buenos Aires) Reuters
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First Published: Fri, Nov 02 2007. 02 32 PM IST
More Topics: global demand | grain | food prices | corn | soybeen |