The harsh reality of transoceanic freight

MINNEAPOLIS — Buyers and sellers of agricultural commodities such as dried distillers grains and soybeans transported between continents on huge container ships should expect little relief from high prices in 2022.

Nor should they expect much improvement from the disrupted global supply chain that has reduced schedule reliability to historic lows and doubled the average delay time for container ship arrivals at ports. Americans, supported by reduced manpower and equipment.

These were the key takeaways from Walter Lanza of Scoular, Omaha, Neb., during a breakout session on the effects of shipping disruption on U.S. agriculture at the U.S. Department’s 98th Agricultural Outlook Forum. of Agriculture. As Director of Commodity Export Trade, Mr. Lanza oversees the international trade and supply chain of animal products covering North America, South America, Europe, Africa and Asia.

Modern container ships are a relatively new development given that ships have been at sea for thousands of years, Lanza said. Shipping freight was a long and complicated business until Malcolm McLean designed and shipped the first containers from New Jersey to Houston in the 1950s. This began what would later be known as intermodal freight with shipping containers that can be lifted from ships and placed directly on flatbed cars or on frames transported by trucks.

Loading costs using the new method fell by 97%, from $6 per ton to 16¢ per ton, allowing for remarkable growth in trade between countries. Containers were among the factors that caused world gross domestic product, which had risen steadily in the 1950s, to rise sharply after 1960. The resulting integration of the U.S. economy into the world economic system was one of the most important developments of the 20th century. This allowed national companies to become truly international companies and the world went from small manufacturers to larger and then global companies in less than 50 years.

At that time, ships were getting bigger and bigger. There are vessels in service today that can accommodate nearly 40,000 containers with a total value of over $1.2 billion. As freight became more efficient and ships got bigger, freight rates have been relatively stable to slightly lower between 2005 and 2020.

“This low-freight environment was not good for steamship lines,” Mr. Lanza said. “From 2008 to 2016, revenue was positive in some years, but negative in others. It was not the most attractive industry to be in. The lack of sustainable profit triggered the acceleration of consolidation Over the past 20 years we have seen many names disappear and many things have changed.The number of major steamer lines has become more and more condensed.

Ultimately, shipping companies settled in what are known as the three great seas: the 2M alliance of Maersk Line and Mediterranean Shipping Co.; the Ocean Alliance of Cosco, OCL, Evergreen and CMA; and the Alliance of Hapag-Lloyd, Yang Ming and ONE, the latter being a recent consolidation of the three major Japanese carriers.

In January 2020, just before the COVID-19 pandemic went global, the shipping container market was so slow that 13% of capacity was unused, 250 scheduled departures were canceled for the April-June 2020 period, and ships were only running about half full. In March, when the United States went into lockdown mode, unemployment soared overnight while the airline and hospitality sectors fell. With people stuck at home, many stimulus dollars have gone to home improvements and new furniture, a key feature of the economic recovery.

“It’s interesting to compare it with the 2008 recession where consumer spending fell for everything because more people were unemployed and spending less,” Lanza said. “In 2020, as the service industry fell sharply, people started buying a lot more goods. You can see a drop in March 2020 for the retail sector, but it got worse. rallied in July and continued to break the trend All major retailers were posting milestones and records including Target, Walmart and Amazon Sales and revenue were the highest they had ever seen so the main thing what they had to do was replenish the stocks.”

It did not turn out to be an easy task.

The massive surge in demand has decimated inventory and overwhelmed the supply chain. Container rates began to rise and did so steadily for 18 months. The rate between China and the United States has gone from around $1,500 per container to almost $15,000, and has certainly affected some US agricultural exports. Worse still, some ships sailed empty, no longer interested in waiting in port for cheap agricultural returns of products like DDGs and soybeans. Unsurprisingly, steamboat lines posted record profits in 2021 and unprecedented profitability. The industry made twice as much in the first nine months of 2021 than in the previous 10 years combined, Lanza said.

Would more ships solve the problem? Unlikely, he said, noting that it takes $200 million to $300 million and two to three years to build ships that size. More are being built, but will only compound what is essentially an infrastructure problem.

“More ships would just be added to the endless queues of ships around the world waiting to be unloaded,” Mr Lanza said. “About 12% of Goal capacity was absorbed due to delays, compared to an average of about 2%. There was a record high of over 80 containers waiting to be unloaded at LA-Long Beach in October of l That’s probably several million containers or about $25 billion worth of freight, which, for comparison, is greater than the GDP of some small countries like Iceland.

“Ports have already made some changes to become more efficient. Some ports have extended their opening hours to 24/7 operations, but the issues run a bit deeper. There is a shortage of workers across the industry, including dock workers, truck drivers and warehouse workers. After the port there is a lack of frames and a lack of drivers to pick them up at the port. Same when they arrive in warehouses. They are falling behind because there are not enough workers to unload. The problem is only growing, like a snowball.

Meanwhile, reliability is also at an all-time low, he said, pointing to Sea Intelligence data measuring schedule reliability on 34 different trade lanes. Reliability is around 35% to 40% today, considerably lower than the historical average of around 75%. As a result, the average arrival time is now eight days compared to the historical average of four.

In the extremely tight U.S. labor market, some reports have estimated the trucker shortage at around 80,000 drivers and projected that number to rise until around 2030. Fewer drivers mean reduced capacity and higher fares. This is a problem for everyone, but especially for the agricultural sector, explained Mr. Lanza.

“In a resource-constrained world, it’s a challenge to compete with Walmart, Target, and all the big retailers. Depending on the products retailers are moving, the total freight value can range from a few hundred thousand dollars to a few million. Compared to a load of soybeans, which is valued at around $15,000 today, the value of the load is considered considerably lower.

So what does 2022 have in store for us?

On the one hand, there is no sign that increased demand is abating or that the supply chain safeguards that have changed the global economy and spurred inflation are improving. Bottlenecks due to lack of chassis equipment for containers and labor shortages in ports and in the cabins of large rigs will continue. Container times in depots will continue to be high. While he doesn’t see much potential for freight rates to drop, Mr. Lanza doesn’t see them going much higher.

According to him, the challenge for the industry is fourfold.

Clogged ports, a major limiting factor exacerbated when containers linger on docks, could be solved with pickup incentives offered by some steamship companies. Dry ports further inland from the United States could ease some pressures, as could making ports more automated, like some European sites. The frames, the metal beds on wheels that carry the containers, are extremely rare. Chassis production should be encouraged and the cost of importing them reduced, he said.

Expanding warehouse capacity and hiring more people to unload goods is also essential. National industry vacancies fell to an all-time high of around 3% in 2021, and the nation’s largest and most important warehouse and distribution center in California had a vacancy rate of just 0.67% in the third quarter.

Finally, the problem of manpower, from port workers to warehouse workers to truck drivers, must be solved.

“The shipping industry will have to adapt and create incentives and look elsewhere to try to fill vacancies,” Lanza said. “None of the freight problems has an easy solution. We continue to see challenges in 2022, but hopefully the industry can find creative ways to be more efficient and alleviate some of the logistical constraints we all face.