El Nino swells to boost Atlantic grain transportation

The stars are aligning for the 2018-2019 Atlantic grain season to give dry bulk shipping a much-needed boost.

With a looming threat of a severe El Nino likely to prolong the drought in Australia and cause very dry weather across Russia and the Ukraine, exports of record crops from South America and the US may send dry bulk shipping rates in the Atlantic to levels not seen since 2012.

Coarse grain production in South America is forecast to increase 17% in the 2018/19 season to hit 161.2 million tonnes of which 57.5 million tonnes will be sent for exports. This is an increase of 8.4% from 53 million tonnes in the current season, according to a research note released this week by Italian brokerage house Banchero Costa.  The forecast boost in exports would generate an additional 75-80 cargoes of 60,000 tonnes, shipped mainly to South East Asia and North Africa.

In the first five months of 2018, Argentina’s corn exports increased 62% year-on-year to 7.9 million tonnes, mainly as shipments to Vietnam, Egypt, and Malaysia increased by 89%, 176%, and 98% compared to the same period a year ago, says Banchero Costa, but adds that higher trucking prices in Brazil has caused a drop in Brazilian exports.

The record South American wheat exports stand in stark contrast to forecast volumes from Australia.

According to Banchero Costa, wheat production in South America is expected to increase 9.0% in 2018/19 to 27.5 million tonnes, mainly as Argentina’s wheat production is forecast to increase 8.3%t to a record 19.5 million tonnes due to good weather.

 The crippling drought in Eastern Australia shows no signs of easing as the country suffers through its worst drought in more than 60 years. Australian Dept of Agriculture (ABARES) this week cut their wheat production forecast from 21.9 million tonnes by nearly 13% to a 10-year low of 19.1 million tonnes, while US commodity brokerage INTL FCStone forecast Australian wheat output for the year to end-September 2019 even lower at just 18.78 million tonnes.  

The removal of Argentina’s wheat export tax in 2015 resulted in a jump in shipments over the 2014/15 to 2016/17 seasons, but the country’s wheat exports have since stabilized, with potential upside in shipments to Asia due to the lower Australian output this season.

 Maritime economics dictate that longer sea voyages result in a larger extraction of vessel tonnage supply from the market, which when combined with increased demand for vessels to transport more cargo is a positive for freight rates.

This reduction in supply and boost in demand is further supported by the likely development of an El Nino event during September and October. A 2018/19 season El Nino would cause dry weather across Australia, South East Asia, India and Russia reducing crop yields for export, while creating wetter conditions across South America and the USA, increasing those crop yields, thereby pivoting transportation demand to the Atlantic.

Freight rates from South America to SE Asia have increased 18% so far this year in step with the increased export volumes. With El Nino, longer voyages from increased Asian demand and a stable outlook for fleet supply, freight rates could increase by as much as a further 35% when the export season starts again 6 months from now in February 2019.

Panamax futures for Q219 are currently trading at $12,800 per day.