Wanted: Containers
AG exporters held up by lack of boxes, Carriers blame poor Asia import volumes.
By Eric Johnson
Agricultural shippers haven't exactly changed punching bags when it comes to transportation service providers, but they may have added a new speed bag to the gym.
At the 2009 Agriculture Transportation Coalition conference in San Francisco in June, agriculture exporters took turns chiding ocean carriers and railroads for not considering their needs.
In return, carrier and railroad representatives said they understood the pressure exporters face, but they were facing economic concerns of their own. In the case of ocean carriers, the concerns are dire indeed.
'Exports started falling off in October 2008,' said Ed Zaninelli, vice president of transpacific westbound trade for OOCL. 'January didn't even happen in my book. We backed out of the trade because the rates were so low. The combination of import/export rates are so low, you can't even compare it to previous years. We're at $800 to $1,000 per TEU below what it historically has been, which is why there are such big losses.'
But, interestingly, most of the talk at the conference centered on everything but rates ' namely carrier customer service, container availability and rail service to agriculture export origins. That's not so surprising given the bottom-barrel nature of freight rates these days.
'Last year, I could have talked for two hours about how hard it was to ship a bale of cotton from Lubbock to Chengdu,' said Don Lake, vice president of international logistics for Centrix Logistics, a subsidiary of cotton producer Dunavant. 'I was the absolute goat in my company. They'd ask 'Why can't you get better rates?' Now, I'm the hero. We're making money and getting bookings.'
But things aren't real rosy despite the 'heroic' rates. That's because Lake has trouble getting enough containers to the sources of the cotton.
'We just can't get railcars,' he said. 'We can't get them when we need them. You hear a conversation where a shipper will say, 'I need a container,' and the carrier will say, 'I wish you would have told me because I just empty (repositioned) 200 containers back to Southern California.'
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| Ed Zaninelli vice president of transpacific westbound trade, OOCL |
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| 'We can't go after freight that doesn't pay and pay to go after it. It doesn't make sense.' | |
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Lake said using truckload companies is not really an option for Dunavant's business.
'Our costs increase 30 percent if we have to truck it to Dallas and transload, and 45 percent higher to Memphis,' he said. 'We could go to a J.B. Hunt or a Schneider, but operationally, that means there's way too many irons in the fire.'
Lake said using a company like J.B. Hunt requires switching from a 40-foot container to a 53-foot container at a hub in, say, Dallas for the transit to Los Angeles.
'You're doubling, or more, the hands that touch the shipment,' he said. 'It doesn't fit with the way our company is set up.'
Eastbound Hurts Westbound. Another shipper said that container availability seems to depend purely on import levels.
'The decline in imports reduces availability of containers for exporters,' said Emily Lauzon, international logistics manager at Minnesota-based Davisco Foods International, which exports mostly whey products to markets in Europe and Asia. 'For us, it's exacerbated by our need for food-grade containers. Carriers seem to be relying on import turns to supply containers. They're no longer willing to absorb the costs of repositioning to inland destinations.'
Zaninelli didn't dispute the point. 'The rules of repositioning are: never move a container if you don't have to,' he said. 'Places like Chicago or Houston take care of themselves, but the problems come in the small, oddball locations. We can't reposition empties to Chicago when the rates for ag exports don't cover the costs of the move itself and repositioning.'
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Zaninelli said he understands the plight of ag shippers, but he also said that carriers have to look sensibly at what will drive profit.
'There is no profit in any westbound ag movement for dry freight,' he said. 'Why do we do it? Because there's incremental revenue over repositioning an empty.'
He said carriers will rationalize the repositioning of every container against the empty repositioning of it back to the U.S. West Coast.
'That's why we can't do reverse repositioning,' Zaninelli said. 'That's a negative cost. We can't go after freight that doesn't pay and pay to go after it. It doesn't make sense. We'll run empty trains to the U.S. West Coast as opposed to say an oddball place like Iowa.'
He even rejected the notion that ag exporters pooling outbound loads might induce carriers to send equipment their way.
'It doesn't make sense economically to drop off a few containers here and there, even on a mainline,' he said. 'The fixed costs to load and unload are too high. Someone will say, 'I've got 500 TEUs a week.' Well, 500 TEUs won't cut it. It's why we have 8,000-TEU ships. It's more economical even when they aren't full.'
Like the shippers, Zaninelli blamed the moribund eastbound transpacific trade for the lack of equipment for westbound shippers.
'Equipment will be a challenge because of eastbound demand,' he said.
The extent to which falling imports are hurting equipment availability for exporters shouldn't be understated. One reason is that the ratio of imports to exports on the transpacific has fallen significantly. For the last few years, the ratio has been two exports to every one import, with the ratio climbing to 3-to-1 during the peak season.
'But now, it's down to 1.4-to-1 for some lines,' Zaninelli said. 'OOCL is at 1.2 to 1.'
For exporters, that simply means there are fewer import boxes from which to draw, and with falling revenue, carriers are less likely to be inclined to move those boxes to inland locations anyway.
'Once the eastbound picks up, it will take some pressure off the equipment situation,' he said.
Contingency Plans. In the meantime, Lauzon said Davisco is trying to plan around the container availability issue, rather than hoping it will improve. Specifically, the company is:
' Asking for its customers to plan four months out.
' Holding more inventory at foreign distribution centers.
' Increasing safety stock levels.
' Booking rail capacity early (in the Midwest, two to four weeks ahead).
Additionally, Davisco has made arrangements with its plants and warehouses to work extra hours and shifts when equipment is available, since that availability is so sporadic.
Given the container availability issue, Lauzon cautioned ag exporters not to fixate solely on rates.
'Although a carrier may offer low rates, it may not have equipment in the area,' she said.
Another westbound-eastbound balance issue is the weight of export goods from North America. Commodity loads sent westbound invariably weigh more than lighter weight consumer goods bound for North America. That means ships going westbound can't carry as many laden boxes as ones going eastbound. Brian Conrad, executive administrator for the Transpacific Stabilization Agreement, said the average weight per TEU is 9.8 tons eastbound and 12.5 tons westbound.
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| 'Twenty years ago, we could plan out our whole year with ocean carriers. But after the Asian (financial) crisis, our cotton buyers went to a hand-to-mouth mentality.' | |
| Don Lake vice president of international logistics, Centrix Logistics |
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'Westbound sailings 'weigh out' with fewer containers, so a 4,000-TEU ship eastbound can't carry that much westbound,' he said.
Conrad also weighed in on the topic of eastbound volume hurting westbound shipments.
'Eastbound demand absolutely drives carrier strategy,' he said. 'And eastbound demand was down 20 percent for TSA carriers in the first four months of 2009. Slow eastbound demand has even affected returns of reefer equipment, which has been gradually migrating to South America.'
Conrad said the load factor in the Pacific Northwest ports temporarily crisscrossed in January, with the load factor westbound actually outstripping eastbound.
'It hasn't happened in Southern California because there's better equipment availability in Los Angeles and Long Beach,' he said.
So it seems that ag shippers will always be plagued by some economic force. Lake said the fact that 'the origins of our cargo are not near containers,' coupled with a rise in just-in-time demands from Asian importers of U.S. commodities has placed ag exporters in a tenuous place.
'Twenty years ago, we could plan out our whole year with ocean carriers,' he said. 'But after the Asian (financial) crisis, our cotton buyers went to a hand-to-mouth mentality.'
The just-in-time model that revolutionized the retail supply chain had also spread down the line to commodities, he said. That has forced Dunavant to hold more inventory to account for sudden orders from buyers who want cotton fast.
'It means that if they buy cotton today, they want it on the vessel in two weeks,' Lake said. 'If the container isn't there, it creates a problem with the buyer who wants that shipment. Also, we make sales based on a price index (for cotton). If we make a sale and can't get a container that day, and the market goes down, we lose lots of money.'
Differing AES Standards. Meanwhile, another non-rate issue to come up during the conference was differing standards between carriers on U.S. Automated Export System filings.
'COSCO requires it 48 hours prior to vessel arrival,' Lake said. 'For Evergreen, it's 24 hours prior to loading. Hapag needs it by noon two business days before arrival. Good lord, guys, let's get an industry standard.'
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| Friedmann |
Peter Friedmann, executive director of the AgTC, said it's a problem many ag shippers are facing.
'Some carriers will accept cargo up to two hours before departure,' he said. 'Some will require four days before vessel arrival and won't work with you if you don't meet it.'
Conrad said he will take the issue to TSA carriers, but frankly admitted that most are in survival mode these days and aren't likely to put issues such as AES filings at the top of their priority lists.
Speaking of which, Lake said the low rates on offer signal to him that there are serious problems ahead for carriers.
'There will have to be contraction' in the carrier industry, he predicted. 'Things can't continue the way they have, and then I'll go back to being a goat. I'm really worried about the contraction. Nothing good can come out of carriers bleeding this kind of money. The scary thing is, the carriers' numbers are based on freight rates that were higher than this (past quarter). What's the second quarter going to look like?'
Bob Reinecke, president of North Star Container, a Midwest-based non-vessel-operating common carrier, said ag shippers have to incorporate contingencies into their carrier procurement strategies. He suggested they work with a mix of carriers. He said a carrier he spoke with was 'shocked' to find out he had contracts with 15 carriers.
As an addendum to that advice, he said exporters must consistently review vessel service agreements among carriers to ensure the mix is providing proper carrier diversity. In other words, if a shipper works with three carriers, but all of them take slots on the same service, that shipper may be getting slight variances in customer service, but not enough protection from the vagaries of ocean shipping today.
'For instance, when Zim and the Grand Alliance came together, it took 2,000 TEUs off the market, and that left us in a tough situation,' Reinecke said. 'Make sure you're covered across VSAs.'
He also suggested establishing weekly allocations for core carriers.
'Pick specific carriers for specific lanes, albeit with contingencies,' he said.
The last complaint came from Debbie McMillan, with Derco Foods, a West Coast almond and nut exporter, who said, 'There's a dearth of carrier customer service. We know you can't make the vessel go faster, or clear customs quicker, but if you just appeared to care, half the battle would be won.'
Rail Takes Its Lumps. And finally onto the speed bag ' the railroads.
In the past few years, shippers were at the throats of carriers, but this year the knives were also out for railroads, specifically BNSF, which had two representatives at the conference. When Hayden Swofford of the Pacific Northwest Asia Shippers Association suggested that the largest cost component of any inland move is rail, Fred Malesa, vice president of international intermodal for BNSF, said the railroad hadn't raised rates on ag exports for two years.
Swofford shot back that he understood that the railroads increased rates up to 40 percent prior to that, and said that keeping those elevated rates stable was not helping shippers.
'A lot of that is misinformation,' Malesa countered. 'Rates kept up with inflation plus our level of capital investment. (Reports of 28 percent to 40 percent increases) are not correct.'
Swofford in turn replied that he had been told by carriers that the railroads had indeed pressed for that level of rate increases. He also pointed out that Conrad of the TSA had said carriers were getting no breaks on rates for repositioning empties, something that might induce carriers to help ag exporters get the containers they need.
'We don't comment on rates with our carriers, but BNSF is trying to redirect flows,' Malesa said.
Another shipper, Brenda Barnes of freight forwarder Allports, worried that BNSF was focusing on ag exports this year to make up for poor revenue from its eastbound intermodal business, which Malesa disputed.
'Are we a fair-weather friend to ag box exporters?' he said. 'Absolutely not. We have nurtured this business for a long time. It was a small part of our business, but we are having annual growth and growth is a sign of commitment.'