Containerized Grain Update: June 2019

This article has been reprinted from the June 20 USDA Grain Transportation Report.

Containerized grain exports between January and April felt the pressure of a relatively slow grain market, with movements down 10 percent compared with the same period last year (see table below).

Distillers’ dried grains with solubles (DDGS) experienced the biggest individual decrease, down 16 percent, followed by corn and animal feed.

Soybean exports claimed the top containerized grain export, with 964 thousand metric tons, a 4 percent decrease year over year.

Overall, destination markets for containerized grain shifted during the first 4 months of 2019, compared with the same period in 2018.

Of the top 10 destination markets, U.S. containerized grain exports to Taiwan, Vietnam, and Thailand decreased, while other markets such as Indonesia, Japan, and Malaysia (see chart) increased significantly.

Exports of DDGS decreased in key markets such as China, Vietnam, Taiwan, and Thailand, but increased in Indonesia and Japan.

For containerized soybean exports, decreases in shipments to Taiwan and Thailand were offset by increases to Indonesia, Malaysia, Vietnam, Japan, and Korea.

2019 Outlook for Container Market Uncertain

Shippers at the recent Agriculture Transportation Coalition (AgTC) Annual Meeting expressed what most in the international trade industry describe as a year of uncertainty. There are several issues with unknown variables overshadowing international trade.

Walter Kemmsies, Economist at JLL Ports, Airports, Global Infrastructure, described the current circumstances with a military term, “VUCA,” which stands for “volatility, uncertainty, complexity, and ambiguity.”

A few of the key challenges include: the new lowsulfur fuel mandate, continued trade negotiations with China, and the availability of chassis when and where they are needed for exports.

Each of these circumstances, discussed further below, is either currently affecting the overall supply chain or is likely to impact it in the next few months.

IMO 2020: Shippers are concerned the International Maritime Organization’s (IMO 2020) impending low-sulfur fuel mandate will not only increase freight rates, but will impact global vessel capacity and ship schedules.

To comply with the low-sulfur fuel mandate, all ocean vessels will need to be cleaned to run on the new low-sulfur fuel or be retrofitted with exhaust scrubbers.1

Experts at the AgTC Annual Meeting reported that anywhere from 2 to 6 percent of the global vessel fleet is expected to be fitted for emission scrubbers.

This will leave most of the global fleet to convert vessels to use low-sulfur diesel.

The biggest unknown is the price of the new fuel, which will not likely be determined until the fall and early winter, as fuel production ramps up and carriers begin bunkering the new fuel in advance of the January 1, 2020 implementation date.

The ocean carrier industry estimates it could increase annual fuel costs by $10-15 billion in 2020, which eventually would show up in the form of higher rates to shippers.

Both compliance options require vessels to be taken out of service for several days, to either be cleaned to receive the low-sulfur fuel or retrofitted with scrubbers.

Carriers are scheduled to start these modifications in late summer and early fall, during the typical peak holiday shipping season and just before peak grain harvest season.

Agricultural exporters could face impacts to vessel capacity, vessel availability, and freight rates during that time.

Trade with China: All shippers are carefully monitoring impacts from a possible increase in U.S. tariffs for certain Chinese products. Experts at the AgTC Annual Meeting expect another round of “frontloading” cargo in advance of a possible tariff announcement.

As seen in 2018, surges of cargo moved in advance of the last U.S. tariff announcement put pressure on the overall supply chain.

Impacts reverberated in the form of both ocean port and inland rail terminal congestion, limited chassis and container availability, and shipment delays throughout every leg of transit.

Chassis Challenges: The chassis industry is complex and fragmented, offering varied applications around the country.

Multiple solutions have been applied regionally, all with challenges. Chassis are the metal frame and wheels (trailer) upon which a container is mounted for movement over the road.

Shippers at the AgTC Annual Meeting said the current chassis delivery models used at ports and inland terminals are not keeping up with growing intermodal container demand.

A recent white paper by the Federal Maritime Commission reported, “The current chassis provisioning model is broken and needs immediate address to improve supply chain velocity.”

A container cannot move without this critical piece of equipment.

Most chassis are provided to the industry via three major chassis providers.

Moving a container involves contracting with multiple parties to provision chassis, including the ocean carrier, the trucker, the railroad, and the shipper.

This complexity makes the supply chain less efficient.

A so-called gray pool (interoperable pool of chassis) seemed to be the solution to which most shippers can ascribe.

However, it is met with opposition from some key transportation and equipment providers.

Mr. Kemmsies’ term VUCA resonated with many in the audience.

With so many aspects of the industry in flux, the remainder of 2019 could be challenging.