Freight rates and commodity prices rising

By Ahmed ElAmin

- Last updated on GMT

Related tags Fao International trade

Record-high international freight rates and increasing commodity
prices are raising the costs of imports, says a new forecast

Processors are already dealing with higher packaging and energy costs. The added hit from rising commodity and transport costs serves to put a further squeeze on plant operations, which have been under pressure from management to become more efficient as margins decline. Global food import bills are increasing, partly due to soaring demand for biofuels and record high freight rates, according to the latest outlook report from the Food and Agricuture Organisation (FAO). Global expenditures on imported foodstuffs are set to surpass US$400 billion in 2007, about five per cent above the record of the previous year, the FAO stated. Dry bulk freight rates surged to record highs in recent months due to continuing strong mineral demand in China and increased grain and soyabean shipments, according to the report. The Capesize cargo sector led the market on heavy demand, with a tight supply of tonnage caused by port congestion and weather delays. The Panamax market sector profited as shippers moved to split larger shiploads into Panamax-sized parcels. Some of the ships on longer timecharters were being re-let at a sizeable premium, the FAO reported, quoting the International Grains Council (IGC). Short and longer period charters continued to dominate the market. In the Panamax sector, rates for Pacific crossings were boosted by large volumes of iron ore and coal shipments to China. Congestion in Australia's Newcastle port, the world's largest coal terminal, continued to tie up tonnage. Atlantic crossing rates remained higher than in the Pacific due to continued high demand for South American grains and soyabeans, and a tight supply of ships. Strong demand for freighters in the Mediterranean and in the Black Sea also continued to push rates higher in the region. In the commodities sectors meat and dairy supply costs are rising on the back of more expensive feed ingredients, raising expenditures on imports of those commodities. Increased consumer confidence in meats, following a reduced incidence of animal disease outbreaks in the past year, should result in a recovery in demand in developing countries in 2007, the report said. Global meat exports will increase by 3.8 per cent as trade bans are gradually lifted and markets return to more normal patterns, the FAO forecasts. Poultry prices have recovered after declining by 18 per cent in early 2006, mainly because of outbreaks of avian influenza. By March 2007, export prices in the US increased by 20 per cent, and in Brazil by 14 percent, from their 2006 annual averages. The two countries account for 70 per cent of the global trade in poultry. Prices of dairy products are currently at historically high levels. The FAO price index of traded dairy products has risen by 46 per cent since November 2006. International prices for milk powders have increased most, as the EU has depleted its stocks, the FAO reported. The FAO forecasts a higher growth in global milk supply, which may increase by 2.7 per cent in 2007. Drought in Australia, the suspension of milk powder exports by India, and Argentina's export taxes are all serving to restrain the export supply in the short term. "However, EU dairy policy reform is changing the structure of international markets as its export market share declines, creating opportunities for emerging exporters,"​ the report stated. In other sectors rising prices for imported coarse grains and vegetable oils - the commodity groups that feature most heavily in biofuel production - account for the bulk of the increase in food import bills. Import costs for these commodities will rise by as much as 13 per cent from 2006, the FAO forecasts. In the sugar market, generally high and volatile prices could lead to smaller import volumes, which is likely to result in a drop in import costs, the report stated. "The food import basket for the least developed countries in 2007 is expected to cost roughly 90 percent more than it did in 2000,"​ said FAO economist Adam Prakash. "This is in stark contrast to the 22 percent growth in developed country import bills over the same period."​ World cereal production in 2007 is forecast to reach 2 125 million tonnes, up 6 per cent from the reduced level in 2006. "The prospect of a strong recovery in global cereal production in 2007 is a positive development, but total supplies will still be barely adequate to meet the expected rise in demand, not only from the traditional food and feed sectors but in particular from the fast-growing biofuels industry,"​ said Abdolreza Abbassian, one of the authors of the report. "This means prices for most cereals are likely to remain high in the coming year."​ The EU is the largest wheat producer and consumer in the world. The bloc's net exports are expected to rise, as production grows faster than consumption. FAO's tentative forecast for rice production this year stands at around 633 million tonnes, matching last year's record level, but with production still running short of consumption. Meanwhile global rice reserves are expected to fall and higher price levels are anticipated, the FAO stated. Rice production , forecasting that production will be about 633 million tonnes Oilseeds and meal prices are also continuing to rise, largely due to surging feed grain prices. Unusually high maize prices are dragging up soybean prices as the two commodities are competing in both the feed and energy markets.

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