Hapag-Lloyd drops ‘bombshell,’ suspends North American ag container shipments

American agriculture interests are often told that the United States waterborne transportation system offers a “transportation advantage” to the price of its export products. That’s not necessarily true, yet, for containerized ag products—at least not until the current economic dynamics of the global container trade change and the waterways infrastructure improves its ability to carry containerized cargoes.

For now, those containerized cargoes must be trucked or railed to coastal ports or inland intermodal rail hubs like Chicago that have access to the St. Lawrence Seaway.

Upper Midwest growers of specialty soybeans and specialty grains for human consumption were recently made sharply aware of their reliance on the willingness of ocean carriers to reposition their containers. German ocean carrier Hapag-Lloyd told customers it was suspending shipments of containerized ag products from North America, effectively immediately and for the foreseeable future. Hapag, which has been among carriers willing to reposition container for exports, now apparently would rather “reposition” its empty containers all the way back to Asia.  Other carriers may be following suit.

In theory, the move could affect all containerized ag products, including chilled meat and fruits and vegetables. But it hits upper Midwest specialty grain growers especially hard. Bagging and containerization are preferred, and often required, for specialized varieties of “identity preserved” grains for human consumption selling at high premiums. There is high demand for such specialized soy products in southeast Asian countries such as Japan, where premium soy is made into tofu; and Indonesia and Malaysia, which make tempeh, a fermented high-protein soy product prominent in their cuisines. U.S. IP soy has a good reputation in those countries.

 The container suspension would not affect bulk commodity soybeans, which travel down in barges to the Gulf and are mostly destined for crushing for oil or animal feed.

Carrier economics

The reason for the suspension is the carriers’ economics, according to Peter Friedmann, executive director of the Agriculture Transportation Coalition. Surging imports have created a huge price spread between incoming and outgoing container rates. “If an ocean carrier gets almost $4,000 to move a container full of consumer goods from Shanghai to Los Angeles, it definitely wants to return that container to Asia as soon as possible, even empty if that is faster, in order to send it back to the U.S. loaded with more consumer goods, generating such high freight revenue,” Friedmann told High Plains Journal.

The return journey of a container full of soybeans back to China might earn only a few hundred dollars. But to get those soybeans, the container might lose anywhere up to 20 days of revenue-earning, as it must be trucked empty to soybean growing areas, wait for loading, which doesn’t always happen instantly, then trucked back if they are shipped and transloaded to containers near the terminals.  When fuel costs are factored in, it’s worth it to the carrier to forego the relatively paltry export revenue in order to return the container to Asia for the lucrative import service as soon as possible. That’s especially true of the soy-growing areas farthest from ports—which means those in the middle and upper Midwest.

Mike Steenhoek, executive director of the Soy Transportation Coalition, said the move does not come as a complete surprise. “When the spread is so great between inbound and outbound container rates, with inbound rates almost 10 times more, there’s a lot of pressure on carriers.” Even during ordinary times, Friedmann said, some carriers are reluctant to reposition containers inland, although the economics are better when import rates are not as high. “The difficulty is that the soybeans are grown away from population centers,” he said. “If they were grown in downtown Los Angeles, Chicago or New York, it would be a different story.” Bulky ag cargoes also weigh more, and thus burn more fuel, than lucrative inbound consumer products.

Ken Eriksen, senior vice president-agribusiness at Markit IHS, said between 5 and 8% of all U.S. inspected annual grain export shipments are containerized, with specialty soybeans at the upper end of the range at about 8%. Steenhoek said between 7 and 8% of U.S. soy exports are containerized—about 200,000 containers a year. But it’s a profitable market segment that growers want to expand.

For U.S. exporters, Hapag Lloyd is an important container carrier with a sizeable and modern fleet of vessels. In 2018-19, said Eriksen, of the U.S. grains and products exported in containers, Hapag Lloyd vessels carried 8% of the total, 10% of soybean container exports and the highest volume and share of soybean meal exports at 19%.

Friedmann added there is some evidence that the carriers are granting import customers leeway in how soon they return containers to marine terminals. Carriers usually require them to be returned to the terminals within five days, but some have been allowing customers to keep them for 10 or even 20 days, he said. “This exacerbates the container shortage, which is a factor in making repositioning of containers to serve inland ag exporters even more costly for both the carrier and exporter. The logistical challenges and costs of providing containers to inland locations for loading with soybean, dairy, protein and other ag exports has been a high priority for the Agriculture Transportation Coalition and its member nationwide,” said Friedmann.

Soy exporters shocked

Members of the Specialty Soya and Grains Alliance, a Minnesota-based alliance of companies from around the United States focused on production, processing, and shipping of specialty soy and grain products worldwide, depend on repositioned containers to ship their products. Hapag-Lloyd has been the carrier most willing to reposition them—up until now. SSGA said its members were “shocked” to learn of the decision to suspend container shipments and called it a “bombshell” that “could cause major hardships within the entire U.S. ag community.”

In a press release, SSGA said, “Reports to SSGA are that Hapag-Lloyd has decided it needs to quickly reposition empty containers back to Asian shipping centers, even if it means forgoing hauling critical food and agriculture products back to manufacturers overseas…The decision is being driven by hard economics during a time of unprecedented demand for higher-value North American consumer imports by containers from Asia at premium prices.”

According to Eric Wenberg, executive director of SSGA, in some individual months the percentage of total U.S. grain exports that are containerized could be as high as 25%. SSGA members in the upper Midwest note that the decision will especially hit exporters hard in the Minneapolis-St. Paul region. The strong Twin Cities market frequently finds itself short of inbound containers to meet demand and has long relied on Hapag-Lloyd’s services to reposition containers for exports. 

“Hapag-Lloyd has been one of the most reliable and dependable carriers for rural, inland ag shippers, so this announcement is devastating and shocking,” said Bob Sinner, president of North Dakota-based SB&B Foods and chair of SSGA’s competitive shipping action team. “For those of us in the food soybean arena, we are just coming off a harvest that our overseas food manufacturing customers are anxious and desperate to begin receiving.”

According to information from the global trade data company Panjiva, as read by SSGA, Hapag-Lloyd delivered 878 shipments of U.S. bulk soybeans at a volume of more than 17,000 twenty-foot equivalent units to destinations around the world between Oct. 22, 2019 and Sept. 25, 2020. The majority went to Japan, Indonesia, Hong Kong, Taiwan and Malaysia, as well as to Thailand and South Korea. Over that same span there have been 172 shipments of IP non-GMO food-grade specialty soybeans at a volume of 780 TEU. 

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Food chain disrupted

“This disrupts the food supply chain,” Sinner said, noting that consumption of soy foods has been strong throughout the COVID-19 pandemic and that worldwide food inventories are low. “Companies in those countries rely on us for their food manufacturing. We’ve got our new crop harvested and we’re making significant and consistent bookings with carriers to get our products shipped quickly and as soon as possible.”

Do ag customers have other options? “The levels of competition and choice for shippers is becoming more of a question mark,” Wenberg said. “The remaining 10 main ocean carriers that handle containerized ag cargoes are now operating in just three ‘alliances’ enabling them to utilize each other’s vessels. There has been a lot of consolidation in the industry, and they are under the same price pressures as Hapag-Lloyd. At a time when demand is high, the world needs soy products and U.S. farmers need help, this seems like a short-sighted move. We need bilateral trade. Where is the incentive for the U.S. to import products from elsewhere if we are going to be denied the opportunity to export our products? Who is making this decision to focus on one-way trade?”

“The question now is whether or not other shippers will follow suit,” said Eriksen. SSGA said Hapag-Lloyd’s move “poses an ominous sign for U.S. ag exporters if other ocean carriers decide to follow suit or delay ag shipments.” SSGA is encouraging any carriers considering similar decisions to reexamine this policy and be transparent about its equipment shifts. SSGA said it will “explore all options to work on behalf of its members to try to help resolve this issue and is encouraging exporter members to talk to their shipping representatives.” 

But why are inbound container rates so high to begin with? A combination of factors is pushing rates upward: the approaching holiday season; pent-up demand from the long uncertainty of the COVID lockdown period; consumers ordering more products online from home; the gradual return to service of vessels idled during the initial stages of COVID-19, when demand slowed; and continuing capacity controls by the carriers.

Friedmann of the Agriculture Transportation Coalition holds out hope. “Hapag-Lloyd deserves recognition for being a carrier that has been committed to serving ag exporters located in certain regions, such as the rural upper Midwest. Hapag has undertaken the challenges of repositioning containers for loading there. We believe that Hapag understands how dependent ag exporters are on these services. We are ready to lead a dialogue with Hapag could generate a solution that would allow the carrier to continue to profitably serve these regions.”

David Murray can be reached at [email protected]