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Grain Cargoes Seen Slowing Most in 19 Years on Drought: Freight

The worst U.S. drought in more than a half century and dry weather from Europe to Australia will mean the biggest contraction in grain cargoes for 19 years and unprofitable rates for owners of Supramax commodity carriers.

Global trade in grains will drop 4.9 percent in the 2012-13 marketing year, according to the U.S. Department of Agriculture. Forward freight agreements, handled by brokers and used to bet on future costs, anticipate a fourth-quarter rate of $9,117 a day, 17 percent less than now, Baltic Exchange data show. Shares of Eagle Bulk Shipping Inc. (EGLE), the largest U.S. operator of the vessels, will slump 30 percent in the next 12 months, according to the average of six analyst estimates compiled by Bloomberg.

Corn and soybean prices rose to records this month as U.S. farmers plowed under ruined fields and heat waves across Europe wilted crops from Italy to Russia. The fourth quarter is usually the most important for Supramaxes hauling grain as it coincides with the Northern Hemisphere’s harvests. The period generated the best average returns in four of the past six years.

“Those droughts are very bad news for the shipping industry,” said Marc Pauchet, an analyst at London-based ACM Shipping Group Plc, the U.K.’s third-largest publicly traded shipbroker. “It seems grain production is going to be worse than even we had anticipated.”

Baltic Exchange

Earnings for Supramaxes, each carrying as much as 60,000 metric tons of grain, fell 11 percent to $10,945 a day this year, according to the Baltic Exchange, whose data are used as benchmarks for about 75 percent of all commodity cargoes. Rates averaged $10,324 since the start of January, the lowest in data going back to 2005, as owners contended with a capacity glut.

The 600-foot-long ships need $5,000 to $6,000 to cover operating expenses and $12,000 to $14,000 once financing costs are included, according to RS Platou Markets AS, the investment- banking unit of Norway’s largest shipbroker.

Shares of Eagle Bulk plunged 23 percent to $2.92 this year in New York trading and will retreat to $2.04 in 12 months, the analyst predictions show. The 13-member Bloomberg Dry Bulk Shipping Pureplay Index declined 13 percent. The New York-based company will report a net loss of $54 million for this year, widening from $14.8 million in 2011, the mean of six estimates compiled by Bloomberg shows.

Grain Inspections

Supramax rates for cargoes from the Gulf of Mexico fell more than 10 percent in the past month after the drought curbed exports, Eagle Bulk Chairman and Chief Executive Officer Sophocles Zoullas said in an e-mailed response to questions July 24. The amount of corn inspected for loading at U.S. ports so far in the current marketing year fell 14 percent in annual terms and wheat dropped 21 percent, government data show. Soybeans, sorghum and barley also retreated.

While the USDA cut its estimate for global grain exports by 2.7 percent on July 11, the forecast of 295.8 million tons would still be the second-largest in data going back five decades. The projected decline from the previous marketing year would be the biggest drop since 1993-94. Oilseed cargoes will help compensate for smaller corn and wheat shipments, with soybean volumes poised to expand 6 percent.

Supramaxes are still earning more than other types of carriers. Rates for Capesizes, about four times larger and mostly hauling iron ore, tumbled 83 percent to $4,642 a day this year because of a capacity glut, Baltic Exchange data show. Those for Panamaxes, carrying as much as 80,000 tons, slumped 39 percent to $8,054. Supramaxes are doing better because they are more flexible on the types of cargo they can carry, according to Martin Korsvold, an analyst at Pareto Securities AS in Oslo.

Five Analysts

Eagle Bulk is less reliant on grain exports than it used to be, with the cargoes making up less than 10 percent of total volume in the first quarter. They accounted for 14 percent of last year’s total and 18 percent in 2010, data on the company’s website show. The annual loss will narrow to $46.5 million in 2013, according to the mean of five analyst estimates.

Eleven of the 12 members of the Bloomberg Dry Bulk Shipping Pureplay Index with analyst estimates tracked by Bloomberg are expected to report losses or declining profit for this year. The biggest Supramax operators are China Cosco Holdings Co., the nation’s largest publicly traded shipping company, and Nippon Yusen K.K., the biggest in Japan.

The worst drought since 1956 probably will mean the U.S. will have to cut output and export estimates again, said Erin FitzPatrick, an analyst at Rabobank International in London.

Western Australia

Temperatures from eastern Italy across the Black Sea region into Ukraine reached 35 degrees Celsius (95 degrees Fahrenheit) or more this month, about 5 degrees above normal. Most of Western Australia, the main national wheat-growing region, had below-average rainfall from April to June and was exceptionally dry in July, according to the country’s Bureau of Meteorology.

The International Grains Council cut its global grain production estimate by 3.1 percent to 1.81 billion tons on July 26. The 27-nation European Union and seven other major exporting countries will ship 17 percent less grain than previously expected, the London-based group said.

The global fleet of Supramaxes more than tripled to 1,605 vessels since the end of 2006, according to data from IHS Inc., an Englewood, Colorado-based research company. Owners accelerated orders for new vessels in 2007 and 2008 as rates rose as high as $72,729. Outstanding contracts at ship yards are equal to 22 percent of existing capacity, IHS data show.

While coal and iron ore, export markets each exceeding 1 billion tons a year, account for a greater proportion of Supramax cargoes, grains are the biggest influence on rates in the fourth quarter, said Pauchet of ACM Shipping.

“Supramax demand has suffered from the problems the U.S. has had with drought,” said Peter Norfolk, an analyst at Freight Investor Services Ltd., a broker of forward freight agreement in London. “There’s potential for crop yield estimates to go down further, and that’s clearly a negative development and not beneficial for Supramax demand.”

To contact the reporter on this story: Rob Sheridan in London at rsheridan6@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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