Friday, November 07, 2008

Shipments of food, energy are slowing

Shipments of food, energy are slowing

NEW YORK — The growing financial crisis is constraining world trade with a jumbled mess of frozen credit that could mean shortages of food and energy supplies for some countries.

Shippers of dry bulk goods such as grain and coal worry that importers won’t be able to pay for the goods they receive. And while some anxious exporters hold on to their goods, rates to ship those goods have plummeted to 10-year lows. Some ship owners are even laying up their ships rather than operate at such low rates.

Jefferies & Co. analyst Douglas Mavrinac said while credit markets in general have stabilized somewhat in recent weeks, credit across the shipping industry still remains extremely tight. Some companies that buy goods transported by dry bulk ships — including power plants, steel producers and food makers — are not able to secure letters of credit to facilitate shipments of coal, iron ore and grain they need.

Mavrinac said most markets around the world will work through stockpiles of commodities on hand, including coal and grain. But he said food and energy shortages could be a problem next year, especially in developing countries, if lending does not ramp up and shipping activity continues to stagnate.

“It will take a few months, it’s definitely the worst-case scenario.” Mavrinac said. “Right now there are plenty of ships, but no cargoes.”

Rates for the biggest ships on the seas have plunged to an average of just $5,611 per day, compared with $166,377 a year ago. Some companies, however, have secured charter deals with customers that locked in higher rates.

“That doesn’t imply that global demand is slowing,” Mavrinac said. “It implies that global trade is stalling — ships are idling.”

Bill Gary, president of Oklahoma City-based Commodity Information Systems, noted that with the U.S. harvest season under way, supplies are surging and crops, such as grain, might sit in limbo if tight credit markets continue to prevent the free flow of exports.

As prices for their crops fall, he explained, farmers hold on to more of their crops as they wait for better prices as inventories decline.

Midwestern farmers appear to be confident they can get higher prices if they just keep their grain off the market long enough, said Rod Weinzierl, executive director of the Illinois Corn Growers Association. Farmers paid historically high prices for fertilizer and fuel to grow this year’s crop, and are not eager to sell at a loss.

Weinzierl, who farms 500 acres of corn and soybeans near Stanford, Ill., said local grain elevators are not full yet, so farmers are using up the storage capacity to wait out low prices.

“Right now, there is nothing really forcing farmers to sell, and at these prices they’re not going to,” he said. “The price is actually below production costs.”

Gary said even though the credit markets have eased up a bit, commodity shipments have slowed further as freight rates for drybulk ships continue to plunge.

“Things have gotten worse over the past couple of weeks,” he said. “Last week was probably the worst that we’ve seen.”

Gary noted that shipments of corn, grain and wheat have stalled as receivers of U.S. commodities still don’t trust letters of credit from many banks, if they can be secured at all.

U.S. corn “commitments,” which include corn already shipped and outstanding sales, have tumbled 40 percent from a year ago. Wheat commitments are down 29 percent.

If the credit markets do not right themselves soon, he said, grain exports could dwindle to some smaller Asian countries. Exports to Europe might also weaken if credit does not begin to flow more easily in the next month, he said.

But Gary Martin, president of the North American Grain Export Association, says the possibility of a global food shortage is overblown. The trade group represents public and private grain exporters, including Cargill Inc. and Archer Daniels Midland Co., as well as some farmer-owned cooperatives. A spokesman for ADM declined to comment, and representatives for Cargill deferred comment to NAGEA.

Martin said that while supplies are mounting in the United States as worldwide demand slows, any shipping delays are likely to be on an individual basis, and that credit issues are not a widespread problem for food transfers around the globe.

He noted that the United States has systems in place to prevent major disruptions in the supply chain — such as the USDA’s GSM-102 program, which guarantees credit for commercial financing of U.S. agricultural exports.

Commentary: Friends and students have been mentioning this new development for a few weeks now and this is the first article I have actually read in print. As a lot of my teaching hours are spent trying to explain international trade correspondance and the credit financing process it is a worrying decline in credit worthiness which could really impact Korean purchases abroad of raw materials and commodities essential to their export growth targets. It causes me to wonder if anyone beyond international trade students really understands the problem of stalled global trade due to banks suddenly scrutinizing every credit transaction with fine-toothed combs beyond the process itself to actual damage of business trading relationships. Such positional swings in terms of commodities; first the speculators starve the poor due to their profits and then the exporters starve their customers due to sudden fears over global credit worthiness when the prices tumble.

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