Higher freight costs set to hit profit margins for grain exporters
US 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 US 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 US 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 US, Australian, and Argentine wheat in Middle Eastern markets. Russian wheat would probably be the winner,” a European grain trade source said.
Another European source said US soft red winter wheat, on a free-on-board basis, was currently $6 (€4.40) a tonne cheaper than Russian and Ukrainian wheat and $5 (€3.70) a tonne cheaper than Western Europe origins. “A rise in freight rates would remove this competitive advantage,” the 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 of about $3,000 a day in recent weeks. Analysts and ship owners expect rates to rebound going into the peak export season towards October.
Analysts expect panamax average earnings to rise towards $8,000 to $10,000 a day 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 to rise 10% in the second half. It is currently under 900 — its lowest level in over a year.
US corn and soybean exports are normally at their peak immediately after the harvest in October and November, but tepid interest from buyers has limited forward purchases.
The US Department of Agriculture has forecast that wheat exports in the 2014/15 season will total 25.2m tonnes, the smallest volume in five years. It expects the EU to ship 28m tonnes, its second-highest volume after a record 30m in 2013/14.
