Rabobank: Grain and Oilseed Margins at Risk Due to High Freight Costs

Higher global freight rates are expected to have an increasing influence on grains & oilseed trade dynamics and trade flows in 2018 as the cost of dry-bulk sea freight increases. Rabobank anticipates the margins of grain & oilseed importers and exporters are at risk.

In its latest report “A Bigger World to Sail: Impact of Rising Freight Rates on Global Grains & Oilseed Trade,” Rabobank anticipates that increasing time charter rates as well as high bunker fuel costs will lead to higher freight costs in the coming years. As a result, Rabobank expects a shift in the movement of commodities worldwide with higher freight rates eroding the competitiveness of exports which come from farther afield.

Global dry bulk time charter rates and bunker fuel costs are expected to continue to stay strong in 2018 and 2019

The Baltic Dry Index – an indicator of global commodity freight costs – has increased almost 60% since January 2017 as additional supply of new bulk freight capacity has slowed. With demand growth for dry bulk capacity forecast to surpass supply growth of dry bulk capacity in the next two years, dry bulk time charter rates are forecasted to increase between 10% and 20% YOY in 2018 and 2019.

At the same time, crude oil prices have increased to their highest level in two years in 2017, appreciating to over USD 60/bbl (Brent Oil), making bunker fuel for vessels more expensive and adding to the rise in freight rates.

With more than 85 percent of global G&O trade (more specifically corn, wheat, soybeans, and soymeal) transported by dry bulk carriers, the higher freight costs will have increasing influence on G&O trade dynamics and trade flows in 2018-2019.

G&O exports from Australia to Asia to benefit, while more distant G&O exporters will face pressure.

With Asian countries being net importers of grains and oilseeds and relying heavily on dry bulk carriers to supply G&O products, G&O exporting countries closer to Asia, like Australia, stand to benefit while more distant G&O exporting regions like South America, US and Black Sea will see their competitiveness impacted as freight rates increase. To stay competitive, G&O exporters at a greater distance from their destination will need to reduce their G&O purchasing costs, supply chain costs and margins to trim their FOB price in order to remain competitive.

Asia to face higher G&O import costs

With Asian countries importing a total of 242.5 million metric tons in grains and oilseeds in 2016, Asian countries rely heavily on dry bulk carriers to supply their G&O products from South America, US, and Black Sea.

Increased freight rates will drive up the landed costs of G&O imports such as wheat and soybean to Asia, resulting in higher ‘cost of goods sold’.

Faced with higher freight rates, both G&O exporters and importers should position themselves to preserve their margins. There are a number of strategic options for them to do this, such as choosing an appropriate shipping strategy, improving supply chain efficiency and choosing an appropriate origination and procurement strategy.

Consumers should be ready to face increasing food prices.

Importers may also opt to pass the rising freight costs to customers, which will result in increased food prices.  According to FAO’s latest “Food Outlook – Biannual Report on Global Food Markets, November 2017” report, the cost of importing food is set to rise in 2017 to USD 1.213 trillion, a 6 percent increase from the previous year and the second highest tally on record.  Consumers should be ready to face increasing food prices.

You can find the report here.

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