Kub's Den

Most of the indicators that matter to the grain markets haven't changed much during 2017: The price of corn has dipped 4% since the end of last year, the price of wheat has gone exactly nowhere, the price of soybeans has risen about 1.5% and the U.S. dollar index has cheapened by 8.7%. Federal Reserve-targeted interest rates have tiptoed higher by 0.5 percentage points, cropland values have remained virtually unchanged since 2016, and there are probably other, equally lackluster benchmarks we could look at in early December and confidently say we already know how this year is going to end.

But there is one quietly threatening economic indicator out there on the open seas: the Baltic Dry Index. It's a broad, average measure of the prices charged by the ocean shipping companies who transport large volumes of dry commodities from one port to another across the globe. Since the end of December 2016, the Baltic Dry Index has almost doubled to 1,662. That's a far cry from its peak in May 2008 at 11,793, but it nevertheless demonstrates a trend of improving demand for freight. It shows that consumers across the globe are growing ever-more confident, ever-more eager to buy and sell stuff to each other.

The Baltic Dry Index is basically denominated in U.S. dollars -- the dollars required per day to hire a dry bulk shipping vessel. But the daily quotes collected by the Baltic Exchange, a London-based maritime market information source, are not all apples-to-apples per ton of "stuff" being hauled, so let's not get too hung up on units. The quotes are collected for a broad collection of shipping routes all across the globe and for four separate sizes of ships -- Capemax, Panamax, Handymax, and Handysize -- then indexed according to a weighted average of the global fleet's actual makeup.

It wasn't all that long ago that the BDI hit its all-time low: 290 on Feb. 10, 2016. And yet, we can look back and realize that early 2016 wasn't really a terrible period for raw commodity demand. Certainly, it wasn't worse than 2009, when the index was posting numbers between 1,000 and 3,900. So, obviously, there is more going on behind ocean vessels' freight-pricing than just the demand for raw materials like grain, coal and metal.

In any market, what's the counterbalance against demand? Well -- supply, of course.

And when the whole world in the mid-2000s seemed to think we were entering some grand commodity "super cycle," ship builders got a little carried away, supplying freight space for dry bulk goods. They built lots and lots of huge, new shipping vessels.

It takes years for ships to be built, and it therefore takes years for new freight supply to catch up with demand, and then it therefore takes years for the signal of oversupply to get back to the shipbuilders, and then it therefore takes many years for global demand to ever catch back up with the expanded ocean freight market. That seems to be what is finally happening now that we've passed beyond that early 2016 low on the BDI chart.

Because oversupply seems to have distorted the Baltic Dry Index during the past few years, it has been easy to overlook this economic indicator, and easy to forget how disastrous high freight costs were for global trade during the "bad old days" of the 2008 commodity boom-and-bust cycle. But even if they're not perfectly correlated to real grain demand figures, global freight costs are nevertheless extremely important for determining the final costs paid by foreign end users of U.S. grain.

When the BDI hit its peak in May of 2008, the cost of shipping U.S. grain from the Gulf of Mexico to Japan was also high -- over $130 per metric ton. When the BDI plummeted in December 2008, those Gulf-to-Japan shipping costs were more like $30 per metric ton. Now, near the end of 2017, the USDA's Agricultural Marketing Service pegged the Gulf-to-Japan shipping costs at $42 per metric ton in its latest Grain Transportation Report. For a foreign soybean customer, the difference in freight costs between $30 per metric ton and $42 per metric ton is equivalent to $0.32 per bushel in transportation costs. That price pattern tells a similar story as the BDI chart itself. Grain freight is still relatively cheap, in historic terms, but it's posting year-over-year growth and a continual upward trend.

There has really only been one thing nice to say about the stable, low grain prices lately: that perhaps their stability and their cheapness can attract new global customers and an increased base of demand. However, looking at the BDI chart, the grain industry needs to be aware that the very same global economic recovery that gives commodity traders some optimism may also be presenting a threat (i.e. increased shipping costs) to our price-sensitive customers.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BAS/AG)

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