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American ShipperShippingTrade and ComplianceWarehouse

Bumpy hay ride

Fast growing U.S. forage exports hit by West Coast port problems.

   U.S. farmers have seen good growth in exports of forage crops in recent years. Exports of alfalfa and other hays climbed in value from $286 million in 1998 to $747.9 million by 2009 and to more than $1.2 billion in 2013, then fell slightly in 2014 to about $1.06 billion.
   Most hay that is exported is grown in the West—California, Oregon, and Washington, as well as Arizona, Nevada, Utah, and Idaho. As a consequence, 99 percent of hay exports last year moved through West Coast ports, according to the U.S. Department of Agriculture.
   So it’s been the hay farmers who are among those badly hurt by the congestion at West Coast ports and the strife between terminal operators and the International Longshore and Warehouse Union. 
   “It’s definitely had a huge impact, needless to say. And this is the second time it’s happened,” said Mark Anderson, president and chief executive officer of Anderson Hay. About 90 percent of Anderson’s business is export.
   “Our volume was down 50 percent in the month of November,” said Jeff Calaway, president of Calaway Trading. In December and January, volumes looked to be 70 percent of what the company had contracted. “It’s still below breakeven,” he said.
   In addition to this year’s port congestion and labor slowdowns and the 2002 lockout of ILWU workers, hay exporters point to several years of rocky relations between longshoremen and terminal operator ICTSI Oregon at the Port of Portland, which frequently shut down the container terminal there. There have been slowdowns at the ports of Los Angeles and Long Beach—in 2004 caused, in part, by a shortage of workers, and in 2012 by a strike by ILWU clerical workers.
   “For us, it’s a cycle that does not work in the high-volume, low-margin business that we’re in that is part of a pretty important supply chain to feeding livestock all around the world,” Anderson said.
   “One of our biggest selling points is that we’re a reliable supplier with a good supply base off the West Coast, a lot of good farm ground close to ports,” he explained. “Reliability and high quality is a very, very key selling point to the hay business.
   “So when our customers are running out of hay and the West Coast is considered unreliable it creates huge consequences,” he said.

Transportation Costs. “We are very sensitive to transportation costs. The only reason that we’re really an exporter in the hay business is because the U.S. is a big importer,” Anderson said, noting backhaul freight rates are low. 
   He said hay farmers in the American West have “zero flexibility” to start moving their product to other ports like Vancouver or shipping from East or Gulf coast ports.
   “The economics of that don’t work in the hay business,” Anderson said.
   Shelly Boshart, vice president of BOSSCO Trading, a company that exports straw from grass seed grown in the Willamette Valley, said five years ago her company shipped 80-90 percent of its product through Portland.
   Even before container line Hanjin made its announcement in February to leave the Oregon port, that share had dropped to 30-40 percent, with the majority of its cargo driven to the Washington ports of Tacoma or Seattle for export.
   While lower shipping costs through the Washington state ports offset the cost of the longer dray, she said BOSSCO and its trucking arm, Boshart Trucking, have had to add drivers and equipment.
   That’s because drivers used to make two to four deliveries per day from BOSSCO’s facility 55 miles south of Portland. Today, those drivers can make just one trip to Seattle and, if delayed, may have to park at a truck stop or pull over to the side of the road to comply with federal hours-of-service regulations.
   Calaway, whose company is based in Ellensburg, Wash., said he’s faced similar logistics problems. 
   The company is about 120 miles from the ports of Tacoma and Seattle, and “we budget for our trucks two turns a day. The driver, he needs to get two turns to earn his wages, and for the truck owner—who is us in most cases, we need to get two turns to make our payments and basically at least break even. That’s not happening right now,” he said.
   “This week we had some terminals say, ‘well, we’re closed for export.’ Now we have other options, but we also have cargo we need to deliver and we can’t,” he said.
   “It’s been going on three months,” Calaway said during an interview with American Shipper in late January. “I’m past the point of caring who’s responsible. I could care less. I could go on and on about the union, but you know frankly the management of the terminals, they kicked this can down the road for too many years.
   “For us on the ag export side, we’re talking life and death right now and I’m not kidding. You can’t lose 5 to 10 percent of your capital every month and expect to survive. First of all, the bank’s not going to lend to you.
   “The supply chain’s broken. It’s a wreck,” he said.
   The added costs are “are endless,” Anderson said. “Whether it’s internally in offices and trying to keep up with constant changes in vessel activities and port activities, to trucks being stranded.”
   He said owner-operators who are paid by the truck move have been “basically on a 50 percent pay cut for months. For them, it would be like you getting your pay cut in half.”
   Anderson said a container of hay might have a value of $8,000 to $9,000 and freight transportation might cost $400 to $1,800 depending on the destination.
   While hay farmers are somewhat less vulnerable to port delays than shippers of perishable fruits and vegetables or fresh meat products—they can leave hay in a warehouse for an extra week without it spoiling—Anderson said if he can’t provide regular deliveries overseas buyers may “start thinking, what other alternative should they be looking at other than the West Coast in the future to be more diversified.”

“Broken System.” Anderson would like to see some sort of legislation passed so there’s a certain level of productivity maintained at ports. He does not know the exact form that would take, but noted “exporting and importing is a huge contributor to our economy. This isn’t 20 years ago, 40 years ago, 60 years ago, where we were importing a small amount and exporting a small amount to a base of business.
   “I’m disappointed in the whole system. We have basically publicly-owned port facilities, managed by public officials. We’ve got global corporations that are operating on them that can’t come to terms with employees and all combined maintain a level of   productivity and efficiency that matches global standards,” he said.
   “To me it’s a broken system and I think it’s a mistake to just point out one part of the equation 
Going through this a second time in 12 years, I’m convinced that this is a broken system that needs to be revisited.”
   Anderson pointed out the U.S. economy is closely tied to global trade. “If we are dependent on that, we need a dependable system that is reliable. Just as reliable as any other part of our society and somehow there has to be something put in place for this to happen.
   “There’s other parts of our society where people have drawn the line and said, ‘we will have TSA capability in our airports, we will have air traffic controllers, fire departments, police department and we will have a means to educate our kids,’” he said. 
   “To me, to park the West Coast port situation over in left field and say ‘well that’s just something that’s different’—that’s 60-year-old thinking. It’s not today.”

Source: U.S. Department of Agriculture-Foreign Agricultural Service.

Overseas Markets. About 3.7 million metric tons, or less than 3 percent, of the 136 million metric tons of hay that’s cut and baled (as opposed to consumed in pasture by animals) is exported, according to USDA.
   Straw exports are much smaller at about $14 million.
   But a report prepared by the USDA’s Foreign Agricultural Service in 2012 said the growth outlook was promising for U.S. forage exports to the Middle East and East Asia.
   More than 90 percent of U.S.-grown hay is exported to just five countries: Japan, South Korea, China, the United Arab Emirates and Taiwan, but Anderson noted his company sells to 30 countries worldwide.
   “Especially for dairy, you have to have forage. You can’t feed a dairy cow just grain,” said Levin Flake, a senior agricultural economist at USDA.
   About half the hay exported from the United States is alfalfa, which has a higher protein content than most other hays.
   While Japan has been a large market for U.S. hay for some time, three University of California, Davis researchers—Dan Putnam, Bill Mathews and Dan Sumner—noted in a 2012 paper that China, Korea, and the U.A.E. have been the fast growing hay import markets in recent years, increasing their purchases seven-fold between 2008 and 2012. 
   “Exports have transitioned from a footnote to a major factor for western hay markets, and are likely to become more important in the future,” they wrote.
   Part of the growth is due to the fact that Asian countries are consuming more dairy and meat products as their middle class populations grow. In China, for example, per capita milk demand rose from 4.2 kilograms in 1990 to 28 kilograms in 2012. The country’s dairy herd grew from 2-5 million to 14 million during the same period.
   Mike Dwyer, director of global policy analysis at the USDA’s Foreign Agricultural Service, said it’s also “a reflection that the feed industry itself has become more professional around the world as a lot of animals that used to be raised in the backyard—two cows and a pig—have given way to more modern, vertically integrated feedlot operations and they use very precise feed rations. So much protein, so much roughage so much energy. Roughage is a very low-cost component in the ration analysis that most feed compounders do.
   “If you’re feeding modern-day compound feeds, there will be roughage in there,” he said. “And you clearly would not buy roughage from around the world if the intent was to feed a couple of animals in the backyard—this really only comes into play for feed compounders. But increasingly this is the way animal production is being done around the world—moving from backyard operations to more professional, large-scale operations.”
    Dwyer said, “One of the first things the middle class wants to do is eat meat. So the upward demand on meat has been very strong and feed compounders are trying to maximize the amount of output per unit of input and roughage has a place there.
   “There is no reason why that is going to stop… We believe the livestock industry around the world will continue to thrive, largely because of this moving middle class but also because of the professionalization of meat production where hard-headed businessmen get involved in the feed rationing and compounding,” he said. “I would say the rate of growth you’ve seen over the last five years is definitely repeatable for the next five.”
   The UC Davis study noted water scarcity as another driver for hay exports. The U.A.E. in the Persian Gulf, for example, decided to stop alfalfa production because water was scarce, and lack of water and arable land near cities are limiting factors for alfalfa production in China, as well.
   “The imbalance of trade with China and the U.S. means that the price of ocean shipping to Asia is cheaper than overland transport costs within China, or even within the U.S.,” the university researchers said. While China is working to improve domestic alfalfa production, the country is unlikely to meet domestic demand anytime soon.
   The researchers said some critics have questioned the merits of exporting “virtual water” in the form of hay from the United States, but noted this is true of other crops.
   “Dairy exports themselves have also increased rapidly, so we may be exporting hay directly or hay in the form of milk powder or cheese,” they said.

Source: U.S. Department of Agriculture-Foreign Agricultural Service.

Containerizing Hay. Calaway Trading exports about 19,000-20,000 TEUs of forage products including alfalfa, timothy, sudangrass and grass straw from the seed industry, as well as other commodities such as soybean meal, corn, cotton seed and rice to countries like Japan, Korea, and China.
   Jeff Calaway pointed to three areas as centers for hay exporters—Ellensburg, the Imperial Valley in Southern California, or the Willamette Valley of Oregon. His company grows about 20 percent of the hay it exports, with the remainder purchased from other farmers.
   When hay is exported it’s generally compressed. 
   “In its field package, it’s not a heavy enough load to weigh out a container,” Calaway said. “If you load a field-run product you would get maybe 12-13 metric tons and in a compressed form a lot of the hay and straw can be loaded from 24-26 metric tons. Essentially all we’re doing is altering the packaging of the product to double the load factor.”
   At the hay press, he said, “We also perform a quality control and consistency management function where we’re taking product that’s baled in the field and we run it through our process and sort through it to get a uniform quality and consistency of product.”
   While most hay and straw is used for dairy and beef cattle, Calaway noted a wide variety of livestock consume it, including horses, goats, sheep, camels and elk.
    Growing hay in the eastern United States and shipping it from there would be challenging due to freight transportation costs, Anderson said. But he added growing hay in the East and shipping it through ports there “are things that would probably have to be looked at,” if West Coast port problems continue unresolved.
   Hay exporters face growing competition from growers overseas, including countries such as Spain and Australia, and Anderson said figuring out how to diversify production is something his firm would have to look at “assuming that there is no legislative activity to bring some level of confidence to our port system.”

This article was published in the March 2015 issue of American Shipper.

Chris Dupin

Chris Dupin has written about trade and transportation and other business subjects for a variety of publications before joining American Shipper and Freightwaves.