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Kub's Den                     02/26 06:01

   Sickness Spreads Through Freight Markets 

   Global commodity supply chains have fallen victim to the COVID-19 virus, 
ongoing trade uncertainty and -- at a few crucial chokepoints in Canada -- 
outright sabotage.

By Elaine Kub
DTN Contributing Analyst

   Imagine you are a freight provider -- a trucker, say -- and the demand for 
your services is so poor that the market's freight rates have not only dropped 
to an all-time low, they've actually gone negative. You are effectively paying 
your customers just to give your freight-hauling equipment something to do. 

   This hasn't happened for trucks, trains or barges in the United States 
obviously, but the shocking collapse in freight demand in and out of China, 
which accounts for 40% of global dry bulk seaborne shipments, has dragged ocean 
freight rates to their lowest levels since March 2016. The Baltic Dry Index 
(BDI), a weighted composite of rates for dry bulk shipping routes around the 
globe, dipped to a low of $415 on Feb. 7 and has been slightly recovering since 
then. It's still pretty cheap -- showing you can hire a big ocean vessel (the 
kind that can hold over 2 million bushels of soybeans at a time) for around 
$500 per day. In recent years during the busier shipping months of late summer 
and fall, these prices have tended to be more like $1,500 per day. 

   It's typical for there to be a lull in these rates right around the Lunar 
New Year holiday in Asia and the pre-Lenten carnival celebrations in Latin 
America. In 2020, however, the lull has been more like a coma. 

   For the very largest ships, the Capesize vessels that haul 180,000 
deadweight metric tons or more, freight demand has been so dismal that the 
rates have truly gone negative. The Baltic Exchange, a maritime market data 
provider, saw its Capesize Index turn negative for the first time ever on Jan. 
31, 2020, and although it recovered slightly last week alongside the BDI, that 
Capesize-specific Index was still at -$239 at the start of this week. 

   Grains and oilseeds don't usually get loaded in those Capesize vessels, 
which are too big to go through the Panama Canal and too big to dock in certain 
ports. However, viewed purely as an economic indicator, these negative shipping 
rates are a glaring signal of how badly commodity supply chain movement has 
been affected by the coronavirus outbreak and its associated citywide 
lockdowns, manufacturing shutdowns and even animal culls. In some regions of 
China, feed trucks reportedly can't get through the highway checkpoints to 
supply chicken and hog farms. 

   Here in the United States, grain shipments of all kinds are quieter than 
usual for this time of year and it's not for lack of supply. At the time of 
year when the U.S. Gulf would typically be loading about 40 vessels each week, 
in mid-February 2020, there has been only 80% as much activity. Grain vessel 
ocean rates in January, with origins at either the U.S. Gulf or the Pacific 
Northwest, were already 24% lower than the four-year average for this time of 
year. Then the spread of coronavirus seems to have dashed the tentative 
optimism of the phase-one trade deal, which could have normalized soybean 
shipments from the U.S. to China, two countries that have been in a trade war 
since early 2018. 

   Even if China is in a position to be a large soybean buyer in coming months, 
cheaper ocean freight rates make it easier to switch between alternate origins. 
For soybeans loaded in January-February, the freight cost from the U.S. Gulf to 
China has been seen at $46.50 per metric ton ($1.26 per bushel on top of a 
$9.49 FOB U.S. Gulf price tag, or $10.75 delivered). For soybeans loaded in 
Brazil at roughly the same timeframe, the freight cost to China was only $34.50 
per metric ton ($0.94 on top of a $9.59 FOB Paranagua price tag, or $10.52 
delivered). As the ocean freight market continues to evolve or weaken through 
the coronavirus disruption, this math may change.

   It's not just ocean freight that's weak this winter. Lower year-over-year 
export sales commitments from four of the top five U.S. corn customers (Mexico, 
Japan, Korea and Peru) have stunted rail movement not only to the ports, but 
also south across the border. Barge freight movements as of mid-February were 
running 8% lower than the three-year average and barge freight prices are also 
weak: Illinois barge freight prices are currently 25% lower than the three-year 
average. 

   But at least here in the United States, if there was enough demand to get 
the grain moving, in any direction, we would physically be able to make it 
happen. The miles of parked rail cars would have to be hooked up to a 
locomotive and properly routed, but they could get wherever they need to go. 
Our neighbors to the north are in a different situation.

   Radical environmentalists in Canada have blockaded crucial mainline rail 
routes using parked trucks, wooden pallets and protesters holding cardboard 
signs -- enough to sporadically shut down the Canadian National Railway's 
entire eastern operations since mid-February. Their motivations may be tied to 
oil production, but the results have obviously affected Canadian grain movement 
too, with both the CN and the Canadian Pacific railways struggling to provide 
service. Last week, the CP spotted 74% of the hopper cars ordered by grain 
loaders but the CN spotted only 32% of ordered hopper cars and has had to 
cancel a total of 8,325 cars over the past four weeks. DTN's Canadian Grains 
Analyst Cliff Jamieson told me, "This is largely lost capacity that can't be 
recovered. Indications are there will also be large cancellations in the weeks 
ahead. Arrests were made in Ontario Monday, but railways are claiming that even 
once the barricades come down, it will take weeks to get up to speed again 
assuming there are no further interruptions."

   Ultimately, that means a growing lineup of vessels waiting to be filled at 
the Canadian West Coast and tight space at the Prairie elevators. "Spring wheat 
and canola prices have not yet moved as one would expect given the lack of 
space and rail capacity," Jamieson says. "But I believe we will see weakness in 
basis soon, should this continue."

   So, whether it's an almost-pandemic virus, a faltering trade war or outright 
sabotage calculated to cause the most freight pain, global commodity supply 
chains are certainly having a bad winter. 

   Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are 
Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on 
Twitter @elainekub. 


(BE/CZ )

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