KANSAS CITY, MISSOURI, US — When broad increases in global demand met pandemic-related labor issues in 2021, freight rates along overwhelmed supply chains naturally shot higher, including for agricultural commodity exporters shipping overseas.
But what are the true short-run and longer-term effects on recently surging ocean transportation rates for agri-food product markets?
New research examining pandemic-era rates and outcomes show neither agriculture export levels nor the prices received by producers have been affected by ocean rate spikes in the short run, but likely would over a longer timeline. At the same time, export share models predict rates consistent with those observed in 2021 will lead to the United States gaining market share in the global export market for corn and soybeans.
The findings were uncovered by economists from the University of Georgia and North Dakota State University, who collaboratively designed studies to answer several facets of that question before poring over vast volumes of maritime transport data from publicly traded companies, difficult-to-source proprietary data, and US Department of Agriculture figures and crunching the numbers.
The researchers were asked to speak on some of their recent findings at the USDA’s 98th Agricultural Outlook Forum in late February. Representing the team was economist Michael K. Adjemian, now a UGA associate professor formerly with the USDA’s Economic Research Service, White House Council of Economic Advisors and consultant to Georgia’s commodities futures trading commission.
For the agricultural commodity exporter in 2021, skyrocketing demand for agricultural commodities and food worldwide and the lack of personnel for timely supply chain execution served to raise shipping costs on the sea. Shipping companies were faced with higher energy prices, a shortage of outgoing containers, increased congestion and port dwell times and higher surcharges.
Spiking rates were certainly a pain point for those exporting corn, soybeans, tree nuts and myriad other commodities. But when the UGA-NDSU team studied benchmark ocean freight rates over the past few years, after correcting for inflation, the team found that recent spikes in those shipping rates weren’t necessarily outside of the historical norm.
Adjemian explained the researchers set out to discover the determinants and how ocean freight rates are set; how those shipping rates affected US maritime export levels of agricultural commodities in terms of weight, prices received by producers and global export market share; and how the performance of publicly traded firms is directly affected by shipping backups that influence ocean transportation rates.
“Our main findings are that ocean transportation freight rates rise with the things that economists might expect would cause those rates to rise such as the demand for shipping, fuel prices, congestion at destination ports, and they tend to fall with increases in the fleet capacity, the ability of the fleet or the size of the fleet measured in deadweight tonnage,” he said. “Although we can’t identify statistically significant effects of those higher rates on US maritime outcomes — ag export levels, or the prices that are received by producers in the short run, the most likely models that we estimate, the median effects, are in the direction that you might expect.”
Another measure of the effects was found in agricultural concerns’ performance on US equity indexes. The team observed that since January 2020, stock prices for indices that represent different elements of the domestic agricultural supply chain domestically are up, in some cases substantially. Though the statistic accounts only for publicly traded firms, and uses weighted averages based on market capitalization, it is seen as indicative of the effect on the market in general.
Adjemian and his colleagues used a two-pronged approach in their analyses.
Time series methods were employed to study the determinants of ocean freight rates and the effects they may have on maritime export levels and producer prices. The process was essentially a search through the historical relationships between variables of interest to find out how unexpected rises in one predicts changes in others.
For their global market share analysis, a Monte Carlo simulation model was deployed, optimizing the theoretical trade pattern observed between supply and demand centers that incorporates a range of different supply chain costs and assumes suppliers are trying to minimize costs. The model was designed to explain how the global export market share landscape looks with the observed rises in ocean transport rates versus a world where those rates didn’t rise the same way.
The economists collected maritime transport data at a monthly frequency, searched through a variety of proprietary data, and pulled out producer prices from the Bureau of Labor and Statistics for 17 agricultural commodities, some tending to ship by bulk vessel, such as corn and sorghum and some commodities that tend to ship by containerized vessel, such as eggs, cheese and milk.
“The first question we try to ask is what explains those ocean freight rates themselves,” Adjemian said. “What we’ve got is a shock, an unexpected rise of about 1% in the level of export commodities worldwide. What we are showing is that rise predicts an increase in the price of shipping. An unexpected rise in exports, the demand for shipping services raises the price of shipping. These effects maintain across not just bulk, but containerized commodities.”
Meanwhile, when an unexpected increase in the supply of vessels and the capacity of fleet measured in terms of deadweight tonnage leads to a reduction in the price of shipping, “something you might expect, and an economist would certainly expect,” he said.
“We know the determinants of ocean rates themselves,” he said. “And then stepping back, we know that those rates increase, but how did maritime ag export levels in terms of weight and the prices producers receive for those commodities change since the pandemic onset? Take away the normal seasonality that we typically observe from those commodity markets and index everything into equal 100 in January of 2020, what we observe at the median or middle effect on the 17 commodities that I analyzed, we see increases in agriculture export levels and the prices producers receive. At the median we see increases in the maritime agricultural expert level. There are certainly outliers, but on average increased export levels and increases at the median on average for producer prices, 43% in the case of those commodities that tend to export by a bulk vessel, and 17% for those who tend to export by containerized vessel.”
Higher prices received and ag export levels observed were consistent with the USDA’s November outlook for US agricultural trade that projected exports are at record levels for fiscal year 2022 in terms of value, the product of export levels and prices. But inasmuch as the possibility remained that broad increases in prices received by producers and agricultural export levels still could be lower than they would’ve been expected to be otherwise if ocean transportation rates weren’t steadily advancing. Another set of time series analyses looked at individual product markets, say peanuts for example.
“We see an increase in domestic personal expenditure on food tends to increase the price of food historically,” Adjemian said. “An unexpected rise in export levels also tends to increase the price that producers receive for the price of peanuts. On the other hand, we can’t identify any level of statistical significance that increases in ocean freight rates also predict measurable effects on export levels in terms of weight, the peanuts, or the prices producers receive.
Another aspect focused on the effect on global market share for corn and soybeans in times of higher ocean transportation rates consistent with the ones observed over the past year. The Monte Carlo simulation model indicated gains in market share for the United States. In the case of a soybean simulation, the United States gained about 4% of market share and Brazil lost out on the same amount. For corn, the United States and Brazil both gained at the expense of Argentina and Ukraine.
“This makes sense because, even though the US is closer to China, a major demand center for soybeans, than Brazil is, these ocean freight rises and congestion challenges are going to act eventually to shorten supply chains,” Adjemian said.
Finally, though the team did not establish that rises in ocean transportation rates necessarily have negative effects on domestic exports, they remained curious whether during the era of rises in ocean transportation rates and supply chain backups led to increased costs that have reduced the profitability of US agricultural firms.
“To study that question, we just plot indices that represent publicly traded agricultural firms and different elements of the agricultural supply chain along with the global supply chain pressure index, a new series developed by the Federal Reserve Bank of New York,” Adjemian said. “Today, as of December 2021, the supply chain pressure index is the highest level ever on record. We find that even as the global supply chain pressure index increased to its greatest-ever observed level, those stock price indices are up between 20% and 60%, which is some indication that at least for publicly traded firms, their bottom lines haven’t been negatively affected necessarily by rising ocean transport rates over the period.”
After closing with a plea for more maritime data transparency to better inform policy makers and supply chain decision makers, Adjemian concluded with a few recommendations to combat the logistical challenges posed to US agricultural exporters.
“Infrastructure investments and policies that permit more throughput at the port level can ease supply chain pressure and a really good example of that is the recently announced partnership between the USDA and the port of Oakland that has popped up in California to help agricultural firms secure and fill empty containers for export,” he said.