Are the current shipping disruptions a concern for global food trade?

20 March 20244 min reading

Global shipping disruptions, particularly in key maritime routes like the Panama Canal and the Bab el-Mandeb, are causing concern for the agricultural trade. Delays and increased costs are anticipated, posing challenges for the animal feed industry.

AMIS (Agricultural Market Information System) - FAO

Several chokepoints have recently been affecting global food trade. Attention initially focused on disruptions of seaborne trade from Ukraine, especially following the end of the Black Sea Grain Initiative in July 2023. However, with the implementation of a “humanitarian corridor”, these flows have largely been restored. Somewhat less in the public focus, disruptions on several inland waterways also challenged transportation and logistics in major agricultural exporting countries, including the Rhine in Germany, the Mississippi River in the United States of America and the Tapajos River in Brazil.

Low water levels resulting from extreme drought, and exacerbated by the ongoing El Niño event, also capped the size and the number of vessels in the Panama Canal locks. Reductions were first introduced in July 2023, and in January 2024 reached nearly 40 percent of volumes compared to last year, leading to extended waiting time and diversions, especially of tankers and dry cargo. Unlike container traffic, bulk shipments cannot book a passing slot or unload intermodal containers by rail. The route via the Panama Canal shortens transit, among others, for the transport of grains, oilseeds and cotton from the US Gulf coast to destinations in Asia, as well as horticulture products from Chile and Peru to Europe and destinations along the US East coast.

Elsewhere, attacks on commercial vessels in and around the Bab el-Mandeb between Yemen and the Horn of Africa have been constraining traffic since late 2023. The route connects the Indian Ocean with the Mediterranean Sea via the Red Sea and the Suez Canal. It accounts for slightly over ten percent of global maritime trade volume, with energy products (mostly crude oil and Liquified Petroleum Gas), being most significant. While earlier attacks appeared to have been directed at container vessels, in January 2024 also a dry bulk carrier and an oil tanker were hit.

Several shipping companies have responded by rerouting maritime traffic via the Cape of Good Hope, also to avoid increasing insurance costs for passing the Strait. Estimates suggest that the number of vessels clearing the Suez Canal has declined by over 40 percent in the past two months. Apart from constraining one of the main sources of foreign currency for Egypt, the events in the Red Sea have already impacted global value chains, especially for sectors that rely on just-in-time delivery systems.

For agricultural commodities, the passage is particularly important for exports of grains and oilseeds from the EU, the Russian Federation and Ukraine to destinations in Asia and east Africa, while rice and other commodities travel eastwards from Asia. Fertilizer trade, including potash from the Russian Federation to Asia, also transits through the Red Sea.

Quotations for Asia-Europe containerized shipping – typically used for rice – have increased by up to six times, depending on the timing, while the benchmark Shanghai Containerized Freight Index has doubled between mid-December 2023 and mid-January 2024. For dry bulk (e.g. grains, oilseeds as well as some fertilizers), broad effects have not yet been observed, although longer shipping routes will likely increase freight costs, mostly depending on the evolution of crude oil prices. There is also a concern about the impact of longer shipping routes on perishable products and live animals, especially those heading to Near East markets.

At a macro level, the Red Sea disruptions could lower competitiveness of Black Sea and other European origins to destinations in Asia, while producers on the American continent might benefit. In several countries higher shipping costs will likely also impact food import bills and subsequently retail prices. The extent to which these will translate into higher consumer prices will depend on whether FOB (and farmgate) prices can absorb some of the increases in shipping costs.

As for crude oil prices, higher energy costs could have spillover effects on agriculture due to the sector’s high energy intensity, including for Nitrogen fertilizer production. The cumulative effect of these disruptions could translate into extended cargo travel distances, escalating trade costs, and a surge in greenhouse gas emissions.

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