Federal agency investigates ag container imbalances

An imbalance in the supply of empty containers for ag exporters to use has worsened to the point where a federal investigation into the trade effects of COVID-19 has expanded into an inquiry into whether or not some ocean carriers might be skirting federal law by refusing contracted ag shipments.

In recent weeks, the container imbalance has sharpened as up to 40 vessels at a time have lain at anchor off the Port of Los Angeles as imports surge and dock workers struggle to keep up. But the imbalance resulting from unbalanced trade could also be exacerbated by certain practices among ocean carriers.

Since March 31, 2020, the Federal Maritime Committee has been conducting an investigation called Fact Finding 29 into supply chain imbalances and disruptions resulting from COVID-19. That investigation has expanded as ag exporters, in particular, have made repeated complaints to the FMC about the lack of empty container availability for agricultural exporters to use.

On Nov. 19, Commissioner Rebecca Dye authorized an expansion of the investigation to certain practices in the ports of Los Angeles, Long Beach, New York and New Jersey. “Because of these stakeholder concerns, the commission now has a clear and compelling responsibility to investigate the practices and regulations that are having an unprecedented negative impact on congestion and amplifying bottlenecks at these ports and other points in the nation’s supply chain. This is a serious risk to the growth of the U.S. economy, job growth, and to our nation’s competitive position in the world.” On Dec. 17, Dye issued an advice to the trade shippers to contact FMC about non-compliance practices.

The FMC is investigating possible violations of the Shipping Act of 1984, which makes it unlawful for carriers to “unreasonably refuse to deal or negotiate,” “boycott or take any other concerted action resulting in an unreasonable refusal to deal,” or “engage in conduct that unreasonably restricts the use of intermodal services.”

They key question is: What is “reasonable” in a time of trade disruptions caused by tariff wars overlaid by a global pandemic?

Shipping empties

During normal times, shippers prefer to avoid using fuel to ship empty containers, or “deadheading” as the practice is sometimes known. The longer a container stays empty, its “dwell time,” the less money the carrier makes.

But these are not normal times. Even at the best of times, some containerized cargoes are worth more than others, or cost more to transport. “I can ship a container to Japan more cheaply than to an inland U.S. West Coast destination,” Rob Prather, chief strategic ambassador at Global Processing Inc. and a vice chairman of the Specialty Soya Grains Alliance, told High Plains Journal.

Trade imbalances resulting from many factors—including Trump’s tariffs, the global pandemic, and other unforeseeable events—have made certain containerized cargoes, like manufactured goods coming from China, worth up to eight or 10 times more than containers filled with U.S agricultural goods going the other way. This imbalance creates an incentive for shippers to maximize profits by getting ships back to China as fast as possible, even if it means carrying empties back instead of waiting for filled containers with lower-value goods. The money that container earns in the return trip from China more than offsets the costs of carrying the empty the other way. A recent article in Supply Chain Dive quotes a logistics expert saying that shippers are sending as many as 75% of their containers back empty.

In October, ocean carrier Hapag-Lloyd created shockwaves by allegedly telling some ag customers that it would no longer carry export U.S. ag containers at all (HPJ, Oct. 30, 2020). Other carriers are suspected of doing the same, although without openly admitting it. Hapag-Lloyd has since said that it is fully cooperating with the FMC’s investigation.

On Jan. 26, msnbc.com published a story based on its own extensive investigation claiming that “shipping carriers rejected U.S. agricultural export containers worth hundreds of millions of dollars during October and November, instead sending empty containers to China to be filled with more profitable Chinese exports.” According to trade figures analyzed by msnbc.com, carriers rejected 177,938 TEUs (20-foot equivalents or containers) in October and November at the port of Los Angeles, New York and New Jersey, with a combined total value of lost export trade of $632 million.

Identity preserved grains

While some of these rejected ag containers contained cotton and other non-identity preserved ag cargoes, most were filled with IP products. Most IP products are destined for human consumption, such as soybean varieties used for tempeh in Indonesia and Malaysia, or tofu in Japan, Korea and other Asian markets. These products command a premium price compared to bulk soybeans destined for soymeal for animal feed, or for crushing for oil, that typically travel by barge to New Orleans.

For growers and handlers of IP grains, the main challenge is geographical: the key growing areas for IP grains in the Upper Midwest are often farther from ports than other ag cargoes. “We have usually booked a freight line prior to the farmer delivering their IP soybeans,” said Prather, either directly or through a freight forwarder. The booking agreement includes a “cut date,” or date by which a given container must be on the dock. But as the msnbc.com investigation revealed, that does not mean that a shipper cannot leave a container on the dock while it ferries empties back to Asia for a more lucrative load of manufactured goods.

IP growers and processors are represented by the Specialty Soya and Grains Alliance, which promotes the benefits of IP grains and has been closely involved in the container supply issue.

Razor-thin margins

The IP cargoes earn a premium price, but that extra margin can be quickly eroded by transportation delays and glitches. IP products are time sensitive and degrade quickly at the risk of the exporter if left on the dock too long, and that degradation is accelerated during hot and humid late summer months.

While Prather believes IP grains represent the future of farming, the market is not yet large enough for IP grains to have their own completely dedicated supply chain. They must be cleaned, stored, handled and monitored separately from bulk grains. That’s why companies that process and transport IP grains prefer to sign forward contracts with farmers in which they—the processors and handlers—assume more of the risk. They sometimes provide the seeds, always specify the handling requirements, and prefer farmers who own their own storage units. IP cargoes rely on a supply chain that was designed and scaled for bulk ag cargoes rather than IP products. Right now, IP grains are a business of “small volumes and razor-thin margins,” according to Prather.

When asked why shippers would ignore containerized ag cargoes when China is still buying huge quantities of U.S. corn and soybeans, Prather explained that most sealed IP grains are destined for other Asian countries, while China is buying bulk grains for animal feed or for building up their reserves. While some regions of China do use a limited amount of IP soybeans in their cuisine, the bigger IP market is non-Chinese Asian buyers.

Not completely digitized

Adding to the headaches is that the ag supply chain is not yet completely digitized. Parts of it are still conducted using paper documents. A number of technology companies digitize and automate part or all of the shipping transaction chain, but the process is ongoing.

Since 2018, Maersk, the world’s largest shipper, has collaborated with IBM and the University of Copenhagen to develop and build a system called TradeLens to replace paper bills of lading with a blockchain-based distributed ledger for which it claims many benefits in ease of use and transparency. By July 2019, Hapag-Lloyd and ONE, the world’s fifth and sixth largest, respectively, had joined CMA, CGM and MSC Mediterranean Shipping Company, in signing up for TradeLens. By July 2019, Maersk claimed four of the world’s largest shippers had joined the TradeLens platform.

“With these additions, the scope of the platform now extends to more than half of the world’s ocean container cargo,” according to Maersk.

Improving turn times

Ports are aware of the problem and are addressing it. Some ports are seeking to improve “turn times” for trucked containers, which would help ease the imbalances. The surge in imports over exports has meant that container stacks have gone from three high to five high at the Port of Los Angeles, lengthening the service times for retrieving containers. The Port of Los Angeles has said that beginning Feb. 1, it will pay terminal operators for improving turn times and increasing dual transactions—i.e., dropping off and picking up a container on the same truck trip, according to a Jan. 20 article in American Shipper.

“These best practices are needed now more than ever to relieve pressure on the supply chain due to the ongoing surge,” Port of Los Angeles Executive Director Gene Seroka said in an announcement. “Ports are more fluid when trucks move quickly in and out of the gates and more productive when a truck delivers one container and leaves with another in a single trip. We’re going to reward terminals for better performance.”

Imbalance to worsen

Those efforts will be needed more than ever in the coming weeks. On Feb. 8, the monthly Global Port Tracker report released by the National Retail Federation and Hackett Associates reported that import containers are expected to rise sharply.

“The import numbers we’re seeing reflect retailers’ expectations for consumer demand to the point that many factories in Asia that normally close for Chinese New Year this month are remaining open to keep up,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “Regardless of whether it’s in-store or on retailers’ websites, the record holiday season and numbers for 2020 show [U.S.] consumers are buying again and have been for a while. This surge has been going on for months, and retailers are importing merchandise faster than ever.”

That means the container math will continue to be bad for ag exporters for some time.

David Murray can be reached at [email protected].