Supply Chain Woes

Why is it such an anxiety-laced struggle to buy a jug of glyphosate this fall? The short answer: I don’t know. No one knows the full interwoven shuffle of influences that are driving up prices for some products and cutting off availability for others. A longer answer involves looking at several of those influences:

During global pandemic lockdowns, consumers spent less money on going out and more buying gadgets for their homes. This runaway trend slowed in July 2021.

A CONGESTED SUPPLY CHAIN
To plant wheat this fall or to get everything set up for row crop planting in spring 2022, U.S. grain producers must have seeds, fertilizers, herbicides, seed treatments, machinery parts and all the other crucial little things that need to be shipped from the distant places where they’re manufactured to the rural storage sheds and fields where they’ll be used. At the same time, South American farmers are urgently scouring the global marketplace for planting inputs, and farmers from every other region of the globe need those herbicides too. Unfortunately, just as all this demand is hitting, the shipping capacity of the world’s ocean vessels and shipping containers and trains and trucks is already overfilled by all the other stuff that people have ordered over the past 16 months since the initial shock of the global COVID-19 pandemic.
In numbers released last month, the U.S. Bureau of Economic Analysis showed monthly spending on durable goods (things that last three years or more: furniture, appliances, tools, electronic gadgets, etc.) in July 2021 remained above $2 trillion, although the figure represented a pullback from May’s record-high $2.065 trillion. Durable goods spending accelerated sharply after the COVID-19 shock in March and April 2020, when global pandemic lockdowns prevented consumers from going out and spending money. Instead, consumers directed their money toward gizmos and widgets for their homes, which typically arrive in the U.S. packed in the same shipping containers needed for everything else (including tractor parts). Congestion at the Port of Los Angeles has persistently kept about 60 container ships waiting in line in recent weeks. All those gadgets and all that stuff — even if it’s manufactured domestically and doesn’t need to be shipped thousands of miles across an ocean — still needs to be shipped somehow between manufacturing plants and consumers, competing against intermediate bulk containers (a common method for shipping fertilizer) for truck driver availability, if nothing else.

A SHORTAGE OF SUPPLY CHAIN WORKERS
This one is tricky. It may be that there is legitimately a shortage of qualified workers (for instance, commercial truck drivers who already have their CDLs) compared to the sheer volume of stuff that needs to get unloaded at the ports, handled in warehouses and trucked where it needs to go. Or it may be that there is a shortage of people willing to take those jobs at the wage levels being offered. This seems like a problem that could be solvable, eventually, but it’s anyone’s guess about how or when.

HIGHER PRICES FOR INPUTS’ INPUTS
If you’re alarmed by the sudden price increase for natural gas, with Henry Hub prices recently above $5 per metric million British thermal unit (MMBtu) after drifting mostly under $3 since 2014, at least be thankful we’re not in a region at the mercy of Russian natural gas shipments: European natural gas prices skyrocketed past $20 per MMBtu last week. Global arbitrage is limited for natural gas unless it’s liquified, but we should still expect prices to remain elevated as winter approaches. That’s alongside RBOB gasoline futures above $2 per gallon and heating oil futures above $2.15 per gallon. Diesel prices in the Midwest, currently ranging about $3.10 to $3.25, are $1 per gallon higher than they were a year ago. Basically, any sort of fuel is currently priced at a multiyear high, and that only adds to the price tag for any crop input that’s being shipped.

WEATHER
The manufacturing plants where certain crop inputs are made — notably glyphosate and glufosinate — have suffered unfortunate weather disruptions at just the wrong time when producers are relying on new supplies to somehow make it through the supply-chain quagmire. Bayer’s glyphosate plant in Luling, Louisiana — the largest producer in the United States — had to temporarily go offline while Hurricane Ida hit that region late last month. Meanwhile, global production of glyphosate has perhaps never fully recovered since floods in China’s Sichuan province in 2020 damaged production capacity of not only glyphosate but also of the industrial chemical (an iminodiacetic acid called PMIDA) that’s necessary to make it. Clear information isn’t available about how much global glyphosate production capacity is operational right now or how quickly the industry could meet global demands, even if it didn’t face shipping challenges between the manufacturing plants and the crop fields.

FEAR AND SELF-FULFILLING PROPHECIES
Every coffee shop conversation about the scarcity of glyphosate (and every online article, such as this one) increases the level of panic in the market, making it more likely that people will run to their suppliers with a desperate willingness to pay any price for the product. It makes me think of lumber prices, which peaked last May at $1,670 per 1 thousand board feet amid a flurry of breathless headlines, but which have since collapsed to a level as cheap as $448 — nearly what they were before the pandemic. However, this herbicide market seems different than last spring’s lumber market because only a few products with legitimate manufacturing constraints are experiencing the disruption. Other herbicide products remain reasonably priced, so perhaps there is neither industry-wide profiteering nor consumer panic elevating the prices, and perhaps the legitimately constrained products won’t be resupplied so easily or have prices snap back so quickly.
I don’t know if buying spring crop inputs at today’s prices will turn out to be irrational or not; calmer prices may or may not resume next year. There is temptation to wait it out, but it’s a decision that could leave a producer scrambling. I will disclose that I signed a contract this week to lock in my crop inputs for next spring, paying 2.5 times as much for Roundup and 75% more for fertilizer than I did when booking inputs last October. And you know what? I don’t feel particularly bad about it. I consider it an opportunity to manage risk and to put a known quantity on paper for 2022’s production among all the other ultimately unknowable things that can happen when farming.

Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

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Sickness Spreads Through Freight Markets

Imagine you are a freight provider — a trucker, say — and the demand for your services is so poor that the market’s freight rates have not only dropped to an all-time low, they’ve actually gone negative. You are effectively paying your customers just to give your freight-hauling equipment something to do.

This hasn’t happened for trucks, trains or barges in the United States obviously, but the shocking collapse in freight demand in and out of China, which accounts for 40% of global dry bulk seaborne shipments, has dragged ocean freight rates to their lowest levels since March 2016. The Baltic Dry Index (BDI), a weighted composite of rates for dry bulk shipping routes around the globe, dipped to a low of $415 on Feb. 7 and has been slightly recovering since then. It’s still pretty cheap — showing you can hire a big ocean vessel (the kind that can hold over 2 million bushels of soybeans at a time) for around $500 per day. In recent years during the busier shipping months of late summer and fall, these prices have tended to be more like $1,500 per day.

It’s typical for there to be a lull in these rates right around the Lunar New Year holiday in Asia and the pre-Lenten carnival celebrations in Latin America. In 2020, however, the lull has been more like a coma.

For the very largest ships, the Capesize vessels that haul 180,000 deadweight metric tons or more, freight demand has been so dismal that the rates have truly gone negative. The Baltic Exchange, a maritime market data provider, saw its Capesize Index turn negative for the first time ever on Jan. 31, 2020, and although it recovered slightly last week alongside the BDI, that Capesize-specific Index was still at -$239 at the start of this week.

Grains and oilseeds don’t usually get loaded in those Capesize vessels, which are too big to go through the Panama Canal and too big to dock in certain ports. However, viewed purely as an economic indicator, these negative shipping rates are a glaring signal of how badly commodity supply chain movement has been affected by the coronavirus outbreak and its associated citywide lockdowns, manufacturing shutdowns and even animal culls. In some regions of China, feed trucks reportedly can’t get through the highway checkpoints to supply chicken and hog farms.

Here in the United States, grain shipments of all kinds are quieter than usual for this time of year and it’s not for lack of supply. At the time of year when the U.S. Gulf would typically be loading about 40 vessels each week, in mid-February 2020, there has been only 80% as much activity. Grain vessel ocean rates in January, with origins at either the U.S. Gulf or the Pacific Northwest, were already 24% lower than the four-year average for this time of year. Then the spread of coronavirus seems to have dashed the tentative optimism of the phase-one trade deal, which could have normalized soybean shipments from the U.S. to China, two countries that have been in a trade war since early 2018.

Even if China is in a position to be a large soybean buyer in coming months, cheaper ocean freight rates make it easier to switch between alternate origins. For soybeans loaded in January-February, the freight cost from the U.S. Gulf to China has been seen at $46.50 per metric ton ($1.26 per bushel on top of a $9.49 FOB U.S. Gulf price tag, or $10.75 delivered). For soybeans loaded in Brazil at roughly the same timeframe, the freight cost to China was only $34.50 per metric ton ($0.94 on top of a $9.59 FOB Paranagua price tag, or $10.52 delivered). As the ocean freight market continues to evolve or weaken through the coronavirus disruption, this math may change.

It’s not just ocean freight that’s weak this winter. Lower year-over-year export sales commitments from four of the top five U.S. corn customers (Mexico, Japan, Korea and Peru) have stunted rail movement not only to the ports, but also south across the border. Barge freight movements as of mid-February were running 8% lower than the three-year average and barge freight prices are also weak: Illinois barge freight prices are currently 25% lower than the three-year average.

But at least here in the United States, if there was enough demand to get the grain moving, in any direction, we would physically be able to make it happen. The miles of parked rail cars would have to be hooked up to a locomotive and properly routed, but they could get wherever they need to go. Our neighbors to the north are in a different situation.

Radical environmentalists in Canada have blockaded crucial mainline rail routes using parked trucks, wooden pallets and protesters holding cardboard signs — enough to sporadically shut down the Canadian National Railway’s entire eastern operations since mid-February.

Their motivations may be tied to oil production, but the results have obviously affected Canadian grain movement too, with both the CN and the Canadian Pacific railways struggling to provide service. Last week, the CP spotted 74% of the hopper cars ordered by grain loaders but the CN spotted only 32% of ordered hopper cars and has had to cancel a total of 8,325 cars over the past four weeks.

DTN’s Canadian Grains Analyst Cliff Jamieson told me, “This is largely lost capacity that can’t be recovered. Indications are there will also be large cancellations in the weeks ahead. Arrests were made in Ontario Monday, but railways are claiming that even once the barricades come down, it will take weeks to get up to speed again assuming there are no further interruptions.”

Ultimately, that means a growing lineup of vessels waiting to be filled at the Canadian West Coast and tight space at the Prairie elevators. “Spring wheat and canola prices have not yet moved as one would expect given the lack of space and rail capacity,” Jamieson says. “But I believe we will see weakness in basis soon, should this continue.”

So, whether it’s an almost-pandemic virus, a faltering trade war or outright sabotage calculated to cause the most freight pain, global commodity supply chains are certainly having a bad winter.

© Copyright 2020 DTN/The Progressive Farmer. All rights reserved.

Soybeans Taking the Fast Lane — The Expanded Panama Canal!

Did you know that 1 out of every 4 (more or less-ish) U.S. soybeans get to cruise through the Panama Canal? They may not be on big enough ships that would require taking the shiny new, expanded third lane that the Panama Canal Authority opened up in June, but nevertheless, their trip could be quicker due to the improved efficiency. To clarify, read https://www.dtnpf.com/agriculture/web/ag/news/article/2016/09/28/soybeans-taking-fast-lane​