With freight rates in the westbound trans-Pacific already under pressure, the great drought of 2012 comes at the worst possible time for shipping lines that carry U.S. exports to Asia.
Agricultural shipments account for 25 percent of U.S. containerized exports to Asia, according to the Westbound Transpacific Stabilization Agreement, a discussion group of 10 carriers in the trade.
Summer is generally a slow period for containerized exports to Asia, but volumes begin to build with the fall harvest and usually peak in March.
Freight rates follow the same trend line. Carriers in the summer months add vessel capacity to accommodate growing volumes of U.S. imports of consumer merchandise from Asia for the holiday shopping season. This new capacity destined for growth in the eastbound volumes enters the trade while exports are softening, so it’s natural for freight rates in the westbound Pacific to fall in late summer and early fall.
Exports to Asia, however, normally pick up in late September as grain harvests begin in the upper Midwest, and strengthen in October and November as the harvests reach into the lower Midwest and the South, said Ed Zaninelli, vice president of trans-Pacific westbound at Orient Overseas Container Line.
Rate erosion in the westbound Pacific this year is well under way. Hay shipments to China, which were commanding freight rates of more than $500 per 40-foot container until recently, have reportedly slipped below $300, for example.
It’s no wonder, then, that ocean carriers are looking with trepidation at the severe drought conditions gripping the eastern half of the country. The U.S. Department of Agriculture is calling the drought the worst since 1956 and the third worst in recent history. Only the droughts during the 1930s Dust Bowl era and in the mid-1950s are worse, so far.
The region suffering from hot, dry, windy conditions stretches from western Nebraska to the Ohio Valley and from southern Minnesota to Arkansas. Corn and soybean crops are endangered, and the problem accelerates with each dry week. Agriculture Secretary Tom Vilsack in mid-July said 78 percent of this year’s corn crop and 77 percent of the soybean crop are affected by the drought. The USDA has declared natural disasters in 1,000 counties in 26 states.
The drought is especially cruel to farmers who planted more crops than usual in the spring because prices were projected to be strong this year. The USDA in early July reduced its estimate for the corn harvest by 12 percent, but if relief doesn’t develop soon, that number could easily double. A prolonged drought lasting through August could be disastrous, first for the corn crop and then for the hardier soybean crop.
This year’s unfavorable conditions follow last year’s severe drought in Texas and the Southwest. That drought resulted in $12 billion in economic losses, according to the National Climatic Data Center.
Repercussions of bad grain and corn harvests, wilting pastures and drying ponds will reverberate throughout the beef, pork and poultry industries. Ranchers this year were forced to shift their herds from grazing pastures to feedlots, but declining harvests have caused the price of animal feed grains to increase.
Erin Borror, economist at the U.S. Meat Export Federation, said the current projections call for beef production to fall 2.5 percent this year. Most of the impact on exports, however, will be felt in subsequent years, she noted. If ranchers increase the slaughter of animals this year because of rising feed costs, more product will end up in the market and prices could fall. The impact of reduced herds will be felt beginning in 2013. With less product available next year, prices will rise.
As corn prices rise, less of the product is used to produce ethanol. Distillers’ dried grain, a byproduct of ethanol production, is used for animal feed, and DDG is an important export to Asia. DDG exports this year are expected to drop, even though the industry received favorable news that China would not proceed with an anti-dumping case against U.S. DDG suppliers.
The drought is affecting a variety of export crops. Corn, soybeans, alfalfa and feed grains such as DDGs are experiencing reduced volumes and quality degradation. Higher-value identity-preserved and specialty grains grown in the upper Midwest and prized in countries such as Japan, Taiwan and South Korea also are being affected.
“We’re in the same boat as everyone else,” said Bruce Abbe, executive director of the Midwest Shippers Association. Although the upper Midwestern states have escaped the scorching conditions seen in the lower Midwest, yields for the premium grain products are starting to be affected, as is product quality. The premium grain products move primarily in containers.
The situation throughout the drought areas could change quickly if steady rains develop and last for a while, but those conditions would have to materialize quickly.
Major waterways in the region, including the Mississippi, Missouri and Ohio rivers, serve as important arteries for transporting grain to the Gulf Coast for export in bulk ships. Reports already are surfacing of receding water levels creating problems for barge operators. If conditions persist or worsen, some of the grain that moves this fall could be shifted to containers, which would be carried to the West and East coasts via intermodal rail.
Cotton is another important export commodity in the container shipping sector. Last year’s crop was hit hard by the extreme drought in Texas. Although conditions are somewhat dry this year in the cotton belt, the situation is better than at this time last year, according to the USDA Economic Research Service.
Cotton crop conditions are at the average level of the past five years. As of July 8, about 44 percent of the U.S. cotton-growing area was rated “good” or “excellent,” compared with 28 percent last year, the ERS reported. Only 18 percent was rated “poor,” compared with 42 percent last year.