With the iron ore and coal trades having heavily hampered the performance of dry bulkers during the course of the past two years, market players have to keep an out for any source of positive potential in the market. In this regard we have seen the grain trade play an ever more vital role in providing some form of comfort and relief in this poorly performing market. This means however that the market has become even more susceptible to the seasonal fluctuations the grain trade holds.
The bumper harvests that have been noted over the past 4 years have been adding steadily to the growth in trade. Being primary commodities that consumers heavily rely on and with their demand not directly and primarily dependent on what investors do, means that even during periods of poor market sentiment and uncertainty the trade can thrive. With the world’s population increasing at a fast pace and with more a more people reaching the middle-class income group, they generate an exponential growth in demand for grain commodities. At the same time the fact that grains are perishable goods creates a market condition whereby prices will heavily reflect the prevailing demand and supply and help market clearing in the favour of increased trade. It is no surprise therefore that as the supply glut has hit the market over the past couple of years, prices have tumbled while trade has remained on a strong upward trajectory.
Amidst all this, it has been the vessel size segments which play a more active role in the grain market that have stood to gain the most. Panamaxes and Supramaxes have gained considerably in this regard since the start of the year, despite the fact that these were also the size segments with the most extensive orderbook schedule for the year and have faced the highest growth in fleet size. Handysize vessels haven’t been left out either, focusing on trades where they can keep their competitive edge due to size restrictions. This has been something prevalent since early spring and with the U.S. Gulf showing bumper volumes of late it looks as though it could continue to be the case. There are however several negative side effects and risks that emerge from all this.
Firstly as the dry bulk market starts to become ever increasingly reliant on the grain trade, it also becomes more susceptible to its seasonalities and the wide volatility they bring. The grain trade has always been one of the main drivers in freight rate seasonality and it looks as though it will start to play an ever increasing role, creating larger variances between the highs and lows in freight rates noted during the course of a year. In addition to this, the grain trade is more unpredictable, relying to a greater extent on weather patterns and crop yield, something which may leave risks of slower volumes traded even though demand dictates something very different.
Secondly the decisions made in terms of production are slow to shift, leaving a big time lag which could also have adverse effects. We may well be seeing a glut in supply now, which in turn may lead to the planning by farmers for decreased production volumes during their next harvest. This may well help balance the market and be to the benefit of both the farmers and traders, but is in direct contrast to the interest of the shipping industry as it means a softer growth in trade volumes and in cases of poor harvest this will also have a compounding effect.
Grains may have played a vital role in the recent market recovery and will likely play an ever increasing role in the market, however they also add to the risks and volatility the dry bulk market will experience moving forward.