Barge Outlook ‘Cautiously Optimistic’ Despite High Water, Tariffs
The impact of the ongoing high-water season on the Mississippi River and other major water arteries was felt in more ways than one at the Inland Marine Expo. Longtime IMX presenter Ken Eriksen—senior vice president at commodities consulting firm IEG Vantage, formerly Informa Economics—was unable to include a towboat report in his barge industry outlook, as his firm had not received enough data yet from towboat companies battling flood conditions. The firm was a month late in getting out its Barge Fleet Profile for similar reasons.
But although the triple whammy of continued and unprecedented high water, disrupted commodity flows due to the trade dispute between the U.S. and China, and China’s swine flu epidemic have hurt U.S. farmers, Eriksen said he remains “cautiously optimistic” overall about the barge industry itself.
Ag Effects May Last For Years
Eriksen said that international commodity markets, especially grain markets, are very attuned to the high water and tariff difficulties in the U.S. China’s first retaliatory tariffs on U.S. export products, including soybeans, on April 4, 2018, “greatly affected commodity flows” around the world, he said. President Donald Trump has already offered suffering farmers a $12 billion package of relief payments and is considering another package worth between $15 billion and $20 billion as the trade dispute with China lengthens with no end in sight. Farmers don’t want payouts, said Eriksen, but prefer a resumption of trade ties.
On top of the tariff pain, farmers have endured an unprecedented series of rains and snowmelt events that have not only flooded plains and delayed crop planting but have caused high water across the whole river system. The Upper Mississippi River was only opened a week ago and may close again as a new round of rains soak the waterlogged upper Midwest. Delays and restrictions on the system are expected to last at least until mid-June. Fertilizer shipments are clogged. Corn plantings are weeks behind; soy plantings only a little behind so far. But windows are closing, he said.
Eriksen said the effects of the U.S.-China trade talks and devastation to U.S. ag production wrought by the floods of 2019 may last for years. Farm bankruptcies are dramatically increasing. Contributing to depressed prices is an approximately 1 billion-bushel soybean “carry-over” stored in bins and elevators. The Brazilian corn crop is “cooked and in the books” already, he said, but meanwhile, “the last thing we need is another humongous soy crop.”
Corn movement on the rivers were strong until the high water, Eriksen said.
Other soy exporters have taken advantage, as South America continues its buildout of port and rail infrastructure designed to catch up to the U.S.’s transportation advantage.
As if floods and trade wars weren’t enough, Eriksen noted the effects of China’s swine flu outbreak, which has already cost 20 percent of its swine herd. Pork is by the far the most commonly consumed meat in China, which normally maintains about half a pig per person. The outbreak is not yet fully contained and may have spread to Africa; Eriksen joked than when he traveled to Asia, his bosses said that before his return flight, he should “burn my clothes and buy new ones at the airport.”
‘Infrastructure Is Everything’
Eriksen noted one bright spot for barge movements: U.S. coal exports were relatively strong in 2019 and were expected to remain so until the second half of 2020. While he joked that coal remains a “four-letter word” to some, the U.S. is a “residual” participant in world coal market—meaning that there are opportunities if the price is right. Coal is still an important energy source in much of the world. But beginning in 2020, the coal barge fleet will be too large and will need to be downsized, he said.
But “infrastructure is everything,” and New Orleans has been bedeviled by high water all year long so far, contributing to profit margin compression among shippers and traders. New commodity traders “don’t know how to deal with these kinds of events,” he said. But even extreme events like the high water could be opportunities for some.
He said two agribusiness giants, Bunge and Archer Daniels Midland (ADM), are both undergoing major reorganizations.
Another looming event that will affect barge movements is the upcoming switch next year to very low-sulfur marine fuels for ocean-going vessels mandate by the International Maritime Organization, known as IMO 2020. While inland diesel fuels are not directly affected and are already much cleaner than blue-water bunker fuels, the changeover will cause local shortage and price increases for diesel fuel and will affect barge movements of petroleum products.
“The burden is on vessel owners and the flag countries” to adapt to this change, said Eriksen. He said he could foresee a possible doubling or tripling of diesel prices in the fourth quarter of 2019.
Barge Fleet Outlook
In a series of charts and graphs, Eriksen laid out the profile of the barge industry. All barge fleet information was as of December 31. “The 1970s-1980s barge fleet is all but gone,” he said. Due to the overbuilding of the late 1970s and early 1908s, due to a tax policy that incentivized speculative barge-building for tax shelters, almost no barges were built between 1981 and 1994.
Eriksen said he remains “cautiously optimistic” about the barge fleet, despite high water and tariffs. “World population is still increasing, and protein consumption is increasing in Asia and Africa.” The barge fleet is slightly larger, despite moving slightly lower overall volumes. The total barge fleet numbers about 25,000, of which about 19,000 are open hoppers and 4,000 are tank barges.
Offsetting the decline of coal is the growth of oil and gas, and the return of the U.S. as a net energy exporter. “LNG has been a rock star” for U.S. exports, said Eriksen. While total exports of ag and energy products—mostly soybeans—to China have totaled around $25 billion, the demand is there in China for another $25 billion to $30 billion of U.S. energy products like liquified natural gas. That could “change with one tweet,” though, Eriksen said to laughter.
There is more scrapping of open barges than covered, Eriksen said, with modest newbuilds. The average value of a 10-year-old covered barge rose sharply, to about $355,000, an increase of almost $50,000.
Average ton-miles for barge moves have gone down this year; though corn has regained distance from an average of 800 ton-miles to 1,100. Barge rates will remain “relatively flat” even as ton-miles creep up again, said Eriksen. Inefficient locks are equivalent to losing 20 percent of carrying capacity. He said he expects barge utilization to be down next year.
In response to a question about spreads between the Center Gulf and Pacific Northwest (PNW) ports, Eriksen said he expects the Gulf to pick up market share going forward as grain cargoes are diverted to other markets. If China returns to the U.S. grain markets, PNW ports should pick up. He noted that Canada has a brand-new export grain elevator open on its west coast, with two more in the planning stage. Canadian railroads will try to draw grain cargoes away from U.S. waterways.
In response to another question about rail competitiveness with barges, Eriksen said that the rail freight industry has limited capacity and railroads like the Union Pacific are changing their whole business model, moving from large unit-trains of one commodity (often coal) to a merchandise-train model. Rail can raise its rates faster than can barges, though, to match rising costs, he said.
To a questioner who asked him to sum up the “handful of positives” for the barge industry on his slides, Eriksen replied that while weather still matters, the Brazilian Real is weakening, which increases the country’s costs; consumer demand in Southeast Asia and Arica remain strong and expanding; and the U.S. has a healthy overall economy.