July 2, 2007

 

Ocean freight costs may fall in July, August; grain prices seen to ease
 

 

Ocean freight costs may fall from July and August as bottlenecks ease, though the longer-term outlook remains uncertain, according to a leading agricultural economist.

 

High shipping charges have pushed up grains import costs to Asia, boosting food inflation across the continent.

 

"Hopefully, we have seen the worst (in freight cost gains) and gradual improvements can be seen from this point on," said Jay O'Neil, senior agricultural economist with the Kansas State University's International Grains Program on the sidelines of the Grains Shipping 2007 conference.

 

The ocean freight cost for panamax grains cargo delivered from US Gulf to Japan, he said, may come down to US$65/tonne from US$70/tonne by August.

 

O'Neil identified two major reasons for the sharp rise in ocean freight costs this year.

 

One is the rising trade in commodities, led by Chinese demand for steel, iron ore and coal. Second is logistical bottleneck, such as congestion at ports in Australia.

 

"In Australia, for instance, authorities are working to improve congestion at the Newcastle port," said O'Neil.

 

He said that while there is a possibility that ocean freight costs may start climbing from September as the US corn and soybean crop is harvested and shipped around the world, he added that gains would be negligible since the grains trade is only around 10 percent of international shipping volumes.

 

He added that new vessels coming out of yards are also expected to add more shipping capacity, though additions of new vessels in 2007 will likely lag additions in 2005 and 2006.

 

O'Neil said that in such a volatile grains market, the best advice for grains buyers in Asia is to buy grains whenever ocean freight costs drop.

 

"Don't be greedy and wait for freight costs to fall more, for the fall may be temporary," he said.

 

He said the trend of shipping grains in containers instead of panamax and handysize vessels would likely strengthen in coming years.

 

Panamax vessels can carry 55,000 tonnes of grain and handysize vessels can carry 35,000 tonnes. A container can carry between 17 and 23 tonnes of grain.

 

The cost of transporting grains by container is lower than by handysize or panamax vessels, especially on the US-to-Asia routes, as a lot of empty containers end up in the US after manufactured goods imported from China are unloaded. These empty containers then haul back grains to Asia.

 

While a panamax vessel from the US to Japan carrying grain may cost around US$70/tonne, it may cost only around US$45/tonne for grains to be carried in containers.

 

"Currently around 5 percent of the world's grains are carried in containers. I see that number rising significantly in coming years," said O'Neil.

 

O'Neil said that US exportable corn surplus is being pressured by increasing demand from ethanol plants.

 

He said that this year, even with a likely record crop, exportable surplus for corn may fall a bit, though there is concern that exportable surplus may fall more sharply next year, as likelihood of two successive record corn crops is low in the US

 

With soybean prices expected to rise sharply this year due to lower planted acreage in the US, corn will face tough competition for planted acres with soybean next year.

 

At the same time, likely demand for corn from ethanol plants in the US is likely to rise to around 101.6 million tonnes, accounting for 28 percent of total corn output, next year from an estimated 81.28 million tonnes, or 26 percent of output, this year.

 

"World corn buyers should worry a lot about the US corn crop in the foreseeable future, given rising ethanol demand, as any weather problems for the corn crop can set prices really high," O'Neil said.