Freight key for Australian ag

Australia's agriculture production is largely focused on export markets.

Given the majority of our value will be sent overseas, and most of our inputs will be imported, we have a significant reliance on seaborne logistics.

Global supply chains have been highly efficient for the past 50 years, with just-in-time management allowing consumers access to the products they require when they require them.

COVID-19 changed all this.

Containers

The graph above shows a comparison of freight rates at July 29 for some of the major routes around the world with the same period one and two years previously.

Container rates have fallen significantly from the same period last year, but remain extremely high compared to two years ago for many major routes.

Not all is equal in terms of freight and routing.

There is a big difference in freight rates and whether they are into or out of China.

China has always had a premium in the longer term, but it has gone into the stratosphere during the past two years.

It all comes down to supply and demand.

There was a huge demand for movements from China, but less from around the world to China.

Container rates are still high globally but are showing some downward movement.

Inflation is beginning to hit hard around the world and consumer spending is starting to decline, which causes a fall in demand for Chinese consumer goods.

The freight rates of the past two years are unsustainable, but shipping companies are still making big money at current levels.

If, as many predict, a major downturn is on the cards, then we will see container rates fall.

This will be beneficial for reducing the cost of our exports.

On the flip side, it may reduce the demand for those exports.

Bulk freight

Australia is heavily reliant on bulk vessels.

We export most of our big commodities in bulk (iron ore, coal and grains) while importing the majority of our fertiliser in bulk.

The price of bulk freight has a significant impact on our competitiveness.

The Baltic dry index (BDI) is used to show the trend in bulk freight costs.

The BDI has been following a similar trend to last year and is sitting above the typically expected range experienced over the past 12 years.

However, the cost of bulk freight has diverged from the pattern experienced last year, when freight cost continued to increase into the second half of the year.

Iron ore is one of the largest commodities moved in bulk, and there is a correlation between price movements of ore and the BDI.

When iron ore prices rise, we tend to see an increase in the BDI and vice-versa.

If current conditions remain, we may start to see bulk freight rates start to decline over coming weeks, based on the current weakness.

A higher BDI signifies increased demand for bulk vessels and as a proxy for the materials they transport.

A higher BDI, therefore, points to an indication of future economic growth and vice versa.

This can be seen in the early 2000s during the commodities boom.

During this period of accelerated economic growth, there was a massive demand for bulk carriers, which drove the BDI to a record 11,793.

This boom was followed by a bust, as the global economy went into slowdown.

A slowdown in the global economy would likely lead to a fall in iron ore demand, especially in the event of a Chinese slowdown.

During the GFC, Australia was cushioned by strong demand for Australian commodities by China as that country went through a growth phase.

The current environment may not provide the same protection offered if the economy slows down.

• Andrew Whitelaw is a manager of commodity market insights at Thomas Elder Markets (TEM)