The U.S. is a soybean surplus country dependent on exports, particularly from the Center Gulf. Brazil’s soybean exports limits the United States’ ability to pass on higher transportation cost to the end user. Ultimately, the transportation cost is backed off from the price the end user is willing to pay. Due to Asia’s great distance from the U.S., ocean freight rates play a major role in the price a farmer ultimately receives. U.S. soybean farmers are directly helped or hurt by changes in transportation costs. Lower transportation costs ultimately result in higher profit margins for every non-transportation player in the value chain. If the transportation costs increase, the farmer can either lower the cash price or store the soybeans until the price improves.
International Maritime Organization (IMO) is implementing new regulations on oceangoing vessel increases. Ballast Water Management System (BWMS) enforcement, which became effective on September 8, 2019 and Low Sulfur Emission Mandate, effective January 1, 2020 will reduce pollution discharged by oceangoing vessels. For compliance, both regulations will require retrofitting that may not be cost-effective for aging vessels or wrong sized vessels. For example, if the lane can handle capsize vessels that hold more than panama vessels, the capsize vessels will be retrofitted while the cost effectiveness of retrofitting the panama vessels is analyzed. The U.S. Department of Agriculture (USDA) reported, “The Low Sulfur Emission Mandate requires the use of low sulfur bunker fuel for compliance. However, the price differentials between low sulfur and high sulfur fuels may be too high to make the option less cost-effective to operate older vessels. Others may be taken out temporarily for retrofitting with scrubbers, which usually take between one to three months to install, temporarily reducing vessel supply capacity. Drewry estimated that about 300 vessels are scheduled for retrofitting until December 2019. Therefore, some vessels may be taken out of operation either temporarily or permanently, thereby squeezing vessel supply capacity.” A smaller ocean fleet does increase the odds of shipping delays. On the flip side, a fleet comprised of larger vessels enables vessels to be loaded faster.
According to some industry analysts, ocean freight prices will increase as vessel supply is reduced as impending International Maritime Organization (IMO) regulations increases the rate of scrapping on older vessels. Granted, ocean freight rates have been trending higher since January 2016, but the starting point was a very low level as shown below. With China’s economy slowing, the expansion in grain, soybeans, coal, and iron ore imports will be less than expiated. The lower demand should offset the impact of the IMO regulations to keep a cap on ocean freight rates. Once the ocean freight market adjusts to the regulations, ocean freight rates should decline.
