The FMC said it has received informal requests from large U.S. exporters, intermediaries, and derivative brokers to consider issuing container freight indexes for U.S. agricultural exports.
“These large U.S. exporters, as well as the Agricultural Marketing Service at the U.S. Department of Agriculture (USDA), have expressed an interest in having access to reliable container freight rate indices that are specific to U.S. agricultural export commodities. They assert that the U.S. export market likely would be quick to adopt index-based contracting because many exporters already are accustomed to hedging risk exposure in the bulk shipping markets and because freight rates represent a much larger portion of the delivered value of their products, which means even quite small freight rate movements can have a large impact on the delivered value,” the FMC said in a notice of inquiry.
The agency is inviting comments by July 8 on the idea.
“These agricultural exporters also point out that they have excellent visibility into bulk shipping rates through the Baltic Dry Indexes, but have no similar visibility into container shipping rates for exports,” it added.
The FMC said it’s asking for comments on:
- Whether and to what extent shippers would find targeted U.S. export rate indexes beneficial.
- Whether it should extract rate information from service contracts or whether suitable alternatives exist.
- Positive and negative influences on the export commodities and ocean transportation marketplaces of the greater transparency such indexes might provide.
- Whether these indexes, if developed, should be commodity-specific for different prescribed routes or whether more broadly based indexes would meet U.S. exporters’ needs.
It noted while each index includes one or more U.S. trade routes, “most of them focus only on the U.S. import leg. The two exceptions are the CTS Index, which issues a lagged monthly index of U.S.-Europe rates benchmarked to 2008, and the WCI, which last year began providing coverage of container rates for freight shipped from Los Angeles to Shanghai and Rotterdam among the 11 route-specific indices it provides weekly.”
The FMC said “most of these indices were developed in the wake of recent rate volatility in the major international liner shipping markets. In principle, the availability of credible rate benchmarks allows shippers and ocean carriers an opportunity to manage freight rate risk.”
Peter Friedmann, executive director of the Agriculture Transportation Coalition (AgTC), said such an index could be useful to shippers because it would help level the playing field with carriers when negotiating contracts.
Carriers have market intelligence about pricing for hundreds of shippers, while shippers have access only to information about the prices they can negotiate for themselves, he said. In addition, carriers have the ability through discussion agreements to share information.
Such an index might allow shippers to hedge freight rates and have predictability in knowing what their shipping costs will be in the future. Friedmann said exporters of agricultural commodities are sometimes asked to quote prices for products six months in advance, but that changing surcharges can mean all their profit on a sale may be lost.
One large shipper noted that in the bulk shipping market, his company is able to fix charter rates up to three years in the future. In contrast, he said with containerized freight his company is lucky if it can get a fixed price three months out.
FMC Chairman Richard Lidinsky will be a speaker at the AgTC’s annual meeting in San Francisco in June.
The National Industrial Transportation League, the country’s largest shipper group, said that to understand the views and concerns of its members a survey will be sent to members of its Ocean Transportation Committee.
The FMC said various parties have “raised questions or concerns about the concept of the commission sampling service contract data for commodity-specific freight rate indexes. For example, they have asked:
- Whether commodity-specific indexes can be aggregated in a manner to protect confidential individual service contract rates.
- Whether release of such indexes would further or contravene the purposes of the Shipping Act.
- Whether release of indexes would benefit U.S. exporters or instead advantage their foreign competitors.
- Whether any benefits to exporters would be sufficient to justify the commitment of commission resources to developing and releasing the indexes.
- Whether issuance of such indexes is better left to private index publishers.
He said Drewry and its rate index joint venture World Container Index are interested in cooperating with the FMC on the project and thinks such indexes should be capable of being used for both index-linked contracts and financial hedging.
“We think that, if aggregated, the indices will not breach confidentiality,” he said, adding “the FMC should work with the private sector to develop joint indices, so that joint indices are created and generate enough liquidity for a derivatives market to develop.” – Chris Dupin
