While increasing demand for food in China and India, the development of agrofuel, and unpredictable weather conditions in the Ukraine and Australia are the main factors cited to explain the recent increase in the prices of agricultural materials, another element joins this array of cyclical and structural causes: soaring freight costs.
After a brief respite in 2006, the Baltic Dry Index – the benchmark index for shipping costs that covers forty shipping routes, three carrier sizes, and a range of raw materials such as iron and grain – has continued the climb it began during the 2004/2005 season.
Clearly, sea transport is not immune to the laws of supply and demand: there are not enough ships to handle the boom in traffic, which has caused prices to skyrocket. In addition, trade in iron and coal ore, dictated by rapidly increasing demand from China, is monopolizing the carriers. Indeed, the mining sector is often more profitable for ship owners, since production and trade are more regular in that sector than for grains.
This is why it cost only 16 dollars in April of 2006 to ship one ton of wheat from the port in Rouen to Algeria, whereas it cost no less than 40 dollars to make that same shipment in May of this year.
Exacerbating the situation is the fact that port infrastructures can no longer handle the increasing flow of ships. Just three years ago, China was the country suffering most from this problem, but major investments have helped to reduce bottlenecks at its port entry points. Large-scale exporters Brazil and Australia are now the ones facing the most severe port congestion.
Conditions are ripe for a speculative bubble, as demonstrated by the expansion of the futures market for freight: the volumes being handled have been increasing every year, even more so over the past several years. The repercussions on agricultural price volatility cannot be far behind.
The cost of shipping is therefore a determining factor behind soaring prices for agricultural raw materials. The trend can only be expected to intensify in a context of increasing market liberalization, rising prices for fossil fuel materials, and the development of agrofuel. It is unfortunate to see that none of the economic models used by the World Trade Organization include this key variable. The NAR model developed by the WoAgri team of economists does take the variable into account in its study on the collective costs related to the liberalization of trade. |