London | Reuters — 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 clamour 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 such as 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 $5 a tonne cheaper than Western Europe origins (all figures US$).
“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 per cent in the second half of 2014 from the first half. It is currently under 900 — its lowest level in over a year.
U.S. corn and soybean exports are normally at their peak immediately after the harvest in October and November, but tepid interest from buyers expecting lower grain prices and competition from other exporters has so far limited forward purchases of U.S. supplies.
U.S. wheat exporters are already feeling the pinch. Egypt, the world’s top importer, bypassed the lone U.S. offer at a tender last week, opting for Romanian and Russian origins.
“Freight costs for the Egypt tender priced the U.S. out,” said Terry Reilly, grains analyst with Futures International in Chicago. “That’s bearish.”
The U.S. Department of Agriculture has forecast that U.S. wheat exports in the 2014-15 season will total 25.2 million tonnes, the smallest volume in five years. It expects the European Union to ship 28 million tonnes, its second-highest volume after a record 30 million in 2013-14.
“North Africa and the Middle East are going to get served by the EU and Black Sea exports and the U.S. is left with the odds and ends,” a U.S. grain export trader said.
“I’ve been taking down my export estimates not increasing them, just because of the sheer supply of grain elsewhere, especially coming off a huge Southern Hemisphere crop.”
Romania particularly stands to gain from the potential change in flows.
“As the cost gap between coasters (smaller cargo ships) and panamaxes narrows, this will allow countries like Romania, that ship most of their wheat by panamax, to gain competitiveness (towards the Middle East),” another European trade source said.
For corn and soybeans, freight has less of an impact, partly because there are fewer global suppliers. The U.S. and Brazil supply 80 per cent of the world’s soybean exports, while the U.S., Brazil and Argentina combine to supply two-thirds of the world’s corn exports.
— Jonathan Saul reports for Reuters from London, England. Additional reporting for Reuters by Michael Hogan in Hamburg, Valerie Parent and Gus Trompiz in Paris and Karl Plume and Julie Ingwersen in Chicago.