Marketing challenges: Logistics, exports and Canadian imports

Farm Forum

The 2013-14 crop marketing year is confronting more complications on demand and logistics than in previous years. This has depressed local basis and price levels and has encouraged growers to store grain for later shipping.

There are a multitude of factors impacting the shipping market. Major factors include strong growth for several of the major commodity segments, with the growth in Bakken oil and crop shipments being the most notable. There is a persistently strong demand for containers in other logistical market segments. The cumulative impact of this demand strength puts a strain on the U.S. rail system for locomotives, crew, track and car capacity. The barge shipping system also is strained.

Another factor impacting the shipping market is the fact that the major crops have experienced larger than expected production. Corn production in 2013 was 13.99 million bushels, which would be a record high, up 30 percent from last year and up a great deal from earlier estimates.

In addition, soybean and wheat producers had large crops that need handling. Most important is that the corn crop increased drastically between growing season estimates and more recent estimates. The Canadian canola and wheat crops also were much greater than normal or expected. Canada produced 707 million bushels of canola compared with 612 million bushels in 2012 and produced 1,218 million bushels of wheat, compared with 1,000 million bushels last year.

Despite observations of slowdowns in shipping, the U.S. has had very robust exports, especially soybeans. To date, soybean exports and sales for 2013-14 are 1,434 million bushels, compared with a more typical value of 1,115 million bushels. These numbers are 90 percent of the projected total for 2013-14 and are resulting in near record sales on the books for this time of the year.

These sales are driven primarily by the demand for soybeans in China. Although China seems to target about 60 percent of its needs from South America, persistent logistical problems in those countries in recent years have forced China to be more strategically diversified. Indeed, because of logistical interruptions in the Brazilian market in early 2013, China has accelerated early season purchases from the U.S.

There are a number of issues on the supply side of the logistics market. One is the fact that there are major initiatives taking place to upgrade rail capacity. This is especially notable for the Burlington Northern Santa Fe railroad, but probably true for other carriers as well. Because of the many sources of demand growth, the BNSF has initiated a comprehensive upgrading of its track, locomotive and car capacity, and labor pool. Of course, this takes time and money.

The U.S. barge system also is experiencing problems, which could be endemic and longer term. Most notably, the barge system is in need of repairs and upgrading. Repairs are occurring on some locks, but they are stalled, which is resulting in delays. Repairs on the northerly locks are in dire need, but due to federal budgets, the locks only will be completed on a piecemeal basis. All of this creates uncertainty and risk for shippers. They face uncertainty in transit times, congestion, delays and unexpected costs related to ship-loading delays.

The problems in Canada are particularly important. Canada had a much larger crop in 2013 than normal. Also, this will be the second year that the rail system will be operating without controls by the Canadian Wheat Board and other statutory regulations. An earlier Canadian government favored much more nonmarket controls over the disposition of capacity, interport, market and car allocations. While Canadian rail rates are regulated at statutory levels, they are not sufficient enough to induce investment in agriculture and are too rigid to efficiently allocate transportation resources.

Handling costs throughout the Canadian marketing system have escalated and are high by U.S. standards. For comparison, prices in the mid-Prairies for Canadian western red spring wheat are in the 555 cents per bushel range compared with a 640 cents per bushel range in comparable U.S. origin markets.(Prices are listed in cents because of how they are traded on the futures market.) As a result, Canadian handlers apparently are sold out of capacity through May and some into the summer. This has resulted in immense incentives to move Canadian grain through the U.S. system, which is occurring at an unprecedented pace.

The implication of all these factors is important. First, there is a slowdown in shipping and logistical performance. Typically, U.S. rail carriers could get three trips per month for grain shipments to the West Coast. It is now closer to two trips per month.

Second, the value of rail freight has increased to unprecedented levels. Recent quotes are said to be in the $3,000 per car range, and some have indicated quotes up to $4,000 per car. This past week, some quotes are said to be at $4,500 per car. These are for nearby shipments and decrease in later months. In some cases, shippers who are short freight could accrue in excess of $300,000 for added freight costs.

These are record highs by all standards and ultimately will force shippers who are short to accrue premiums for nearby shipping versus deferred. Shippers who had covered their forward needs are less impacted.

Third, there are greater delays and longer transit times than typical for ships. This results in higher demurrage costs throughout the system, but mostly at the point of export, where costs may be up to $20,000 to $30,000 per day for each ship. Taken together, along with other late-penalties, these costs could be in the 30 to 50 cents per bushel range. At 10-plus days, ship demurrage costs could range up to $300,000. Delays in the Pacific Northwest range from four to 18 days and (X) days in Vancouver. Vancouver demurrage costs are in the area of $15,000 to $20,000 per day.

Fourth, we likely will continue to see an increase in shipments of some Canadian grains to and through the U.S. marketing system, even though the cross-border regulations for Canada/U.S. grain trade are far from being sufficiently developed for unfettered trade.

It is not clear how all these issues will be resolved and what the long-term implications are. In any case, these issues do have implications for grower marketing strategies. More than ever, growers are confronted with challenges in crop market and risk management. These events ultimately result in greater risks for shippers and growers who do not make more strategic forward commitments. Further, this shows the importance of growers making marketing decisions with greater scrutiny of the temporal and spatial dimensions of selling.