Rising freight rates add to agflation worries

Monday, 7 March 2011 00:01 -     - {{hitsCtrl.values.hits}}

(Reuters) - Spiraling shipping costs for commodities threaten to drive food inflation even higher as nations from Asia to the Middle East and Africa scramble for supplies, stung by grain prices that have more than doubled in less than a year.

Even if the jump in freight costs proves temporary as new vessels flow into the shipping industry, any add-on costs to food prices that are already at records could stoke fears of more instability in the Middle East and a rerun of 2008’s food riots.

Freight rates on key grain routes, which started recovering from two-year lows on February 4, are expected to rise further in the second quarter, driven by soaring fuel costs and a jump in seasonal demand for grains, sugar and cotton.

Global food prices, measured by the UN’s Food and Agriculture Organization, have already hit record highs in January, a problem that will worsen as freight costs feed into the prices people pay for bread and meat in supermarkets.

“We are seeing an increase in grains trade, people are trying to build stocks and it is logical to see an impact on the freight market,” said Abah Ofon, an agricultural commodities analyst at Standard Chartered Bank.

“It will cause more concern over food inflation as all that adds up to the cost of commodities.”

A brief spike in Asian grain demand in February doubled daily earnings for panamax vessels from the U.S. West Coast to the Far East, also known as the transpacific route, to $15,398 from $7,590 in a little over two weeks.

The typically volatile market has since subsided along with a momentary pause in Asian demand, but analysts said the surge was just a preview of things to come.

“In each of the last four years, the run-up to the Latin American grain export season has been characterized by a marked rise in panamax earnings,” said ship brokerage firm SSY.

“A high proportion of Latin American cargoes will be bound for long-haul markets in the Far East, notably China where the U.S. Agriculture Department expects another new record for the country’s soybean imports.”

Brazil and Argentina -- the world’s leading exporters of corn and soybeans -- enter the market around March after the harvest each year, selling cargoes to customers in Asia, led by top importers China, Japan and South Korea.

Average earnings for panamax vessels on the transpacific route .BPHJ, a key line for corn and wheat shipments, soared as much as 48 percent from February to May last year, and 186 percent during the same period in 2009.

Other key grain freight routes, including handysize and supramax shipment lines from Australia to Asia, were also likely to rise in the second and third quarters.

The rally, however, was not expected to be as strong, nor last as long, as in previous years due to a flood of new vessels that has kept the broader freight market .BADI near two-year lows.

Freight futures indicated earnings on the transpacific route would edge up just 7 percent to average $14,925 a day in May, up from $13,980 in March, according to the Baltic Exchange.

Grain shipments represent just over 10 percent of the overall dry bulk market, trailing the two dominant commodities -- iron ore and coal -- that each represents 30 percent of seaborne trade.

“We could see one or two bright spots in an otherwise depressed freight market -- the grain routes being one of them,” said a Seoul-based shipbroker. “I’m sure there will be a bounce in rates, but how big is the question.”

The predictions for a smaller-than-usual seasonal bounce in freight rates, however, do not take into account soaring oil prices and piracy risk insurance that could fuel a larger rally, if shipowners decide to pass the costs on to their clients.

Bunker fuel prices, which can make up anywhere from 10 to 70 percent of operating costs depending on the type of vessel, have climbed to 2- year highs along with oil’s surge to near $120 a barrel.

“Bunker fuel prices are going up and it is a very large cost in running a ship,” said one chartering manager with a global grains trading company. “There are a lot of issues that are going to gradually push up the cost....on top of that list is insurance.”

A surge in pirate attacks in the Indian Ocean and the Gulf of Aden has also raised the cost of shipping in the region.

FOOD INFLATION

The gains in freight costs, small or not, will add to growing inflationary concerns that have spread from China and India to the European Union, mainly due to red-hot food prices.

U.S. corn, wheat and soybean prices -- key ingredients for making food and animal feed -- jumped to their highest in 2- years in February.

Sugar also surged to three-decade highs on a squeeze in supplies as a result of crop damage in cyclone-hit Australia and uncertainty over exports from India. Prices for Malaysian palm oil, a cooking staple in the developing world, hit 3-year highs earlier in February in the wake of floods.

“It is looking very tight, especially for corn, until the end of the year because stocks-to-use ratio is very tight,” said Nobuyuki Chino, president of Tokyo-based trading company Unipac Grain. “If there is adverse weather during the growing season in the United States, then the sky is the limit for prices.”

Corn posted its third straight monthly rise in February.

The U.S. government last week said U.S. farmers this year would plant corn over the second-largest area in nearly 70 years, but stocks next season would still remain thin.

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