2 December 2021 - “Shipping has gone from one of those costs you don’t really think about…to almost as valuable, if not in some instances more valuable, than the commodity itself that’s moving.”
That statement from S&P Global Platts Freight Editor George Griffiths helps explain why yesterday, professionals from across the agricultural sector, from grains to feed additives to meat, tuned in to an Agribriefing webinar hosted by Agrimoney Editor in Chief Mike Verdin to discuss the disruption being experienced across different agricultural commodity markets.
The roots of this extraordinary situation go back to early 2020, as Griffiths recounts. Even before COVID-19 reared its head, there were already changes ahead for the shipping sector, with new regulations on sulphur emissions set to impose speed limits and capital investments on the sector, so the world was already seeing higher shipping rates. Then came the pandemic. Whether because of strict lockdowns making it literally difficult for staff to come to work and for goods to be produced and exported, or because of companies involved in port operations or other logistics activities letting go of staff amid uncertainty about the future, the sector lost qualified personnel.
And then, lockdowns eased, and a torrent of bottled-up demand hit global supply chains which were unprepared to meet it. In Griffiths’ words, “it was almost the perfect storm—there was a lot of demand and not a lot of staffing”. The chokepoint proved to be containers, which were now taking longer to remove from ships and out of ports into inland destinations. “And what we ended up with was a real shortage of containers in the market.”
The effect felt round the world is prices have gone through the roof; Griffiths said Asia-Europe prices pre-pandemic were between $1500 and $2000, but peaked at $18,000 from Asia to UK and $ 25,000 to the US. This has driven demand towards other shipping formats, including dry bulk.
Beyond raising rates, another consequence has been shippers choosing to prioritize cargo that was easier to handle based on the existing infrastructure, even if the price was not meaningfully different. Griffiths gives the example of sugar coming into a port with a Tate & Lyle terminal upstream; you can simply drive up, empty out, and turn around, operational once more, without the queues imposed by a lack of crane operators or truck drivers.
As Verdin noted, by October of this year, indexes tracking shipping rates, such as the Baltic Dry, appeared to have peaked. Pressed for an explanation, Griffiths said they had finally reached unsustainable levels.
“In terms of fundamentals there’s not that much that changed, there was no market-shifting news… there actually wasn’t that much demand going on at that point, and a whole lot of these ships that had been tied up on these long voyages there were ships that had been tied up suddenly coming back into the market.” To illustrate the impact, he claimed that dry bulk rates have almost halved in some instances compared to where they were at just in October.
Still, the pandemic which is at the root of the disruption is not over, and developments such as the recently-detected Omicron variant of SARS-CoV-2 could still prove to be a “black swan” event. At the time of the webinar, it was still unclear whether Omicron would prove to be even more infectious than the currently dominant variants, or might even prove to have immune-evading mutations which might make vaccinations less effective.
Asked whether shipping had been impacted by this recent development, Griffiths was unequivocal: the impacts were immediate, with new restrictions by governments and “people are running scared. We’ve seen commodity and financial markets already take a bit of a tumble over the uncertainty that this has [brought] in,” he said. Shipping rates, somewhat counterintuitively, have gone in the other direction, thanks to front-loading of orders. “We’ve seen a tick up in containers and dry bulk and anything that moves across the ocean... everyone’s trying to move goods before we go into a full lockdown,” he explained.
However, setting aside the effects of a black-swan event like a worsening of the pandemic, Griffiths seemed to indicate that the craziness of 2021 might be in a position to ease somewhat. In dry bulk, he pointed to the possibility of a little more supply coming in, with new ships coming in. Meanwhile, on the demand side of the equation, the big peak that came from companies trying to play catch-up might be behind us.
“People have covered a lot of what they lost in 2020…we’re back down to around 2019 levels, people have rebalanced their markets, people have rebalanced their stores... short term, a little bit of uptick, we’re still uncertain over how this new variant is going to impact us, but slightly longer term, it should be, I don’t want to say smoother sailing, but at least heading back towards something [usual].”
Still, he warned that high freight rates are likely to be somewhat sticky, with shipping companies loathe to lose the huge profits they have been realizing during this unprecedented time. “You’re not going to see [freight prices] falling off a cliff,” he said.
Beyond the container crisis
It is certainly true that these unprecedented freight prices, and in some cases the lack of availability of any shipping capacity whatsoever, has affected every part of the agricultural sector. After all, everybody has goods to move around.
However, as pointed out by Hélène Duflot, grain market analyst from Feedinfo sister publication Tallage – Stratégie Grains (who does analysis and market forecasts for agricultural commodities), the freight situation is not always the most significant factor when it comes to prices of different agricultural goods. “The increase in grain prices are even more important than the increase in freight costs,” she said. This is because at a global level, harvests were very bad this year: “disastrous” in Canada and the US, and coming in lower than expected and with bad quality in Western EU and Russia.
In response, she said, we are seeing some importers lower their standards, for example by allowing increased rates of pest damage, to have more choice and hopefully lower prices. Meanwhile, while the northern hemisphere lacks supply, some are turning to the southern hemisphere. According to her, the FOB price difference between Argentinian and European wheat means that, even in a time of historically high freight rates, it is cheaper for North Africans to import from Argentina rather than their northern neighbours. “In the grain markets, shipping is important but it’s not the biggest element this year, because there are fundamental elements which lead to this increase in grain prices,” she concluded.
On the other hand, the importance of shipping is quite different for agricultural inputs that are only made in a select few places, such as amino acids or vitamins. As recounted by Heather McGuire Doyle, Feedinfo senior analyst, the US spot price for lysine is now so high that it is above the shadow price. This is the theoretical maximum price that buyers will pay before it becomes more economical to reformulate and use soy-based ingredients rather than synthetic amino acids. “That’s had a knock-on effect; as lysine is taken out of diets, more soybean meal is needed, so then we saw this surge in soybean meal because of the higher demand.”
Again, though, the shipping situation was only one of several factors contributing to the upheaval in this supply chain. There were also production and delivery issues at manufacturers around the world, including the disruption caused by the interruptions in Chinese power generation (China being a major exporter of both vitamins and amino acids). Another factor causing headaches for many: a domestic producer of dry lysine decided to switch over to liquid lysine in recent years, making it even more complicated for producers who did not have the means to adapt their facilities to this new format and who cannot secure needed volumes of the old format. Finally, there were the freak events, such as a hurricane in the US which destroyed a shipment of imported amino acids a few months back, causing a force majeure declaration in October. “That came right after all the power issues in China, so it was impossible to get material in to replace it right away. So, fourth quarter was just extremely tight, especially for that product.”
ill that craziness continue? Doyle said that the biggest concern is not having supply until after the Winter Olympics in China (an event expected to slow down production and exports in order to control pollution). According to her, for additives where no US production exists at all, such as vitamins, we have seen a lot of long buying, starting in spring, and there is consequently less buying happening now. “But now as there’s concern about… nothing [being] available in that first quarter, now people are starting to buy again, and then the COVID variant has made people even more concerned.”
Even further down the supply chain, meat production is grappling with its own supply-chain woes. Gary Morrison, market reporter/analyst for Urner Barry with responsibilities for the boxed beef and beef variety markets, pointed out that the container issue in sea freight was really only half of the story of 2021’s shipping crisis. What the US meat sector is feeling most keenly is the trucking shortage. As he said, the last two years has piled new problems onto a trucking industry which had already been in decline and struggling to recruit workers: mandates related to the pandemic meant there were cities where certain truckers were less willing to go, and now California—the landing site for most trans-Pacific imports—is imposing new and cumbersome regulatory burdens on the sector.
That shortage has meant navigating not just a high price environment, but also one where there isn’t enough supply (in terms of shipping space) to go around. “Whenever you can get on the truck, when you get a delivery date, you take it,” he said. “Product availability is top of mind, and pricing is almost secondary. ‘Can I get my product when I need it, I don’t really care about the price.’” The sentiment is echoed by other panelists in the webinar: moreover, as George Griffiths points out later, at a global level capacity has been taken off of the more niche routes to service the backlog in mainstream routes, a phenomenon which has affected places like Africa.
Back in the US, the other main issue is labour. When the packing plants went down in the worst days of the pandemic, this caused a “significant supply shock across all proteins.” However, at the same time that supply went down, demand had swung in the other direction. The inevitable conclusion: “You saw prices spike across the board.” More recently, wages have also been surging upward. Today, he said, “food price inflation is really one of the top stories here at this time.
Although we now have more sophisticated tools than closing meat plants to keep the coronavirus in check, Morrison does not believe there will be a price correction for meat. “There seems to be a structural shift here…I don’t think some of the things causing price increases are going away. Wage and energy increases are huge contributors to prices."
At the same time, as he points out, even with processing now operating at full tilt, demand is higher than ever. “People still have money in their pocket and are buying protein at high rates, even at elevated prices.”
This webinar was an Agribriefing production and included analysts from the following Agribriefing teams:
Agrimoney publishes unmissable news, analysis, and commentary on agribusiness and major agricultural commodities.
Stratégie Grains offers supply, demand, and price forecasts for European and world trade. Its areas of expertise include grains, oilseeds, biofuels, animal feed, durum wheat, malting barley, and other categories.
Urner Barry is a US-based market intelligence platform providing benchmark price reporting for the red meat, poultry, seafood, eggs, and plant protein markets.
Feedinfo specializes in news and data for the global animal nutrition industry, including the only IOSCO-compliant prices for feed-grade vitamins and amino acids.