For many years the Prairie pulse sector revolved around an orderly flow of shipping containers.
They moved out of manufacturing hubs like southern China stuffed with consumer goods of all sorts, to ports in Vancouver and Prince Rupert.
There they were emptied, and loaded again with outbound goods — in this case pulse crops like lentils and chickpeas and other high-value grains such as food-grade soybeans, milling wheat, malting barley and more — before setting to sea again for something known in the business as the ‘back haul.’ That might see the container being sent to various locations including India, for example, before heading back to China to be reloaded there.
But these days those containers are harder and harder to come by as COVID has changed the flow of goods and an informal cartel of shippers has begun to exert more and more influence over the flow of containers to their own advantage.
And for the pulse sector, that’s become a big concern for companies that buy the grain from farmers and sell it to end-users. And it could soon back up onto the farm level.
Greg Northey, Pulse Canada’s vice-president of corporate affairs said that means the sector may not be able to capitalize on strong demand for its products, because containers are getting harder to find and more expensive and that’s beginning to cut into Canada’s competitiveness.
“The actual supply chain for containerized grain of all types out of Western Canada is essentially broken,” Northey said.
Why it matters: Canada exports millions of tonnes a year of pulses and other high-value crops in containers, but that flow is now under threat.
Just how broken is apparent in how the numbers have changed. In 2020, just over six million tonnes, or 12 per cent of Canada’s grain exporters were in containers. In 2021 that fell to 1.3 million tonnes, or 4.2 per cent.
Put another way, Vancouver’s transloading facilities have told Northey they’re seeing monthly volumes drop by as much as a third. And they’re also finding it hard to get containers out of the country once they get them and fill them, Northey said.
“If you get containers and you have them filled… they are just there for 60 days waiting on a vessel,” he said. “They just keep getting rolled and rolled and rolled. So as you can imagine at that point you are out of contract and you have essentially lost any profit from that sale.”
The spark that lit this fire was the COVID-19 pandemic and how it changed the spending patterns of consumers in North America and Europe, says Barry Prentice, a University of Manitoba professor of supply chain management.
Increased demand for Chinese consumer goods was triggered by self-isolating North American and European consumers flush with funds they didn’t spend on trips, concerts and other forms of group entertainment, Prentice said.
Early on in the pandemic, Chinese manufacturers and ports closed at times as government tried to slow the virus’s spread.
Many container ships also stopped sailing for a time, Mark Hemmes, Canada’s grain monitor and president of Quorum Corporation, said in an interview Aug. 31.
“They were cancelling sailings left, right and centre for about a four- or five-month period,” he said. “That means all of the loaded containers didn’t have a ship to get on because the ships that are bringing loaded goods into Canada are also the ships that are also taking it (crops) away (from Canada).”
The disruption to supply chains was unprecedented, Prentice said.
“I’ve never seen it before,” he said. “The congestion has been terrible in all of these places. That has been causing great demand on what we call the ‘front haul.’”
As a result, the many Asian shippers are willing to pay a lot more to get a container, pushing rates to record levels, Prentice said.
People were suddenly paying three times as much for a container for the front haul, he said.
“So if people are paying that on the front haul and people still expect to get a back haul rate on a container for a raw commodity that’s just not going to happen,” Prentice said.
Between Sept. 1, 2020 and Aug. 31, 2021 the container rate index quadrupled, according to Capital Links, which reports on container markets.
“(T)his year, 40-foot-high cube containers surpassed the US$6,500 mark, more than tripling in value over last year to achieve their highest rate since Drewry began tracking container equipment costs in 1998,” the Capital Links website reported.
Front haul rates got so high some people were buying containers for a one-way trip, essentially making them disposable, Prentice said.
“The problem is not just getting containers back, it’s getting them off the ships and delivered too,” he said. “So the whole system is clogged. And of course there is a shortage of containers coming this way at those very high rates. So obviously for the container companies the best deal is to just get them back empty as fast as they can so they can get another high-paying load.”
In the past a few containers were shipped back to China empty, but now it’s the “primary practice,” Northey said.
“They (container lines) are not worried at all about servicing their long-term customers for exports for a back haul. They are making those decisions for their own bottom line. One can say that’s their choice to do that but they act as monopolies.”
Container lines have worked together for years and most countries have legislation exempting them from domestic anticompetitive laws, Northey said.
“But they (container lines) have become much more savvy,” Northey said. “They clearly see how this works now and they are getting smarter collectively as a group. ‘We can make a lot more money by not blowing our brains out against each other.’
“They are absolutely controlling that supply (of containers). They could be profitable doing back hauls and servicing exports, but collectively they are making that decision where they are just going to maximize that profit.
“It’s not just containers. They are doing it with their ships. They are cancelling routes. We even have less routes available to us now to the Indian subcontinent.”
In recent years the number of container lines has gone from around 50 to 10, Prentice said.
“They have a fair share (of the market) especially on certain routes,” he said. “If this persists too long I think nations will start to take a harder look at… what is a cartel.”
Container companies have worked together for years setting rates and volumes, he said.
“It has never been a problem for the last 50 years because there has been such growth… and the rates have been continually dropping in real terms so all the countries have been willing to ignore this cartel activity,” Prentice said. “Whether that will continue is a question as all it requires is a couple of big players like the U.S. or Europe to say, ‘enough of that,’ and that will stop.”
While the container lines act as a cartel, Prentice isn’t certain it’s the cause of high container rates. The market naturally fluctuates, he said. Old-fashioned supply and demand could be a bigger factor.
“This really is a classic case of front haul, back haul rates,” Prentice said. “If the front haul is just way too much then there’s no incentive for a back haul. Just take a round trip rate and go with it. And get another one, and another one and another one. As I always tell my students the three most important words in transport are all the same word: utilization.”
Pulse Canada is certain the container companies are colluding to boost profits at shippers’ expense. That’s why Pulse Canada is urging the Canadian government to take action, Northey said.
“It’s one of the few governments in the world to ignore this problem,” he said. “It has such huge ramifications… We are just not functioning right now. We are completely uncompetitive.”
In contrast the United States government and President Joe Biden are at least talking about taking action, Northey said.
Just talking about anticompetitive behaviour can result in better service, he added.
Pulse Canada has learned some exporters have complained to the Canadian Transportation Agency, providing some hope Canadian regulations can force the lines to provide better service.
“It’s very complicated and it needs to be done and Canada needs to take a leadership role, in our view, because we need to figure out how to handle this because it’s damaging to us and we ought to play a bigger role globally to try and figure out how this works,” Northey said. “We are a trading nation but we don’t necessarily have the power the others do. We should make sure our supply chains are functioning.”
The negative impact on Canadian pulse exports is one example of how COVID-19 has disrupted Canada’s economy.
“Unfortunately it’s like COVID itself — it’s just going to take time to recover from this economic illness,” Prentice said.
While he had expected the container market to have returned to normal by now, Prentice is optimistic it will straighten out. Container ‘front haul’ orders ahead of Christmas shopping season are in full swing, but will then slow.
“I think farmers would be advised to not look at this as anything more than a passing phase,” he said. “Your long term isn’t changing.
“It isn’t clear to me that this is going to extend much beyond the new year.
“We do see the economy opening up more in the U.S. and here more in fits and starts so the pressure on goods is going to be reduced so this will correct itself in time.”
But Northey said the effects will linger beyond that, and right now high crop prices mask the impact on farmers.
“This is adding a cost to the whole system… so the dynamic of that at some point is going to hit farmers,” Northey said. “The bids won’t make sense so there actually won’t be buyers… Ultimately for the merchants and the exporters it’s just a very difficult time where you just can’t execute, which has substantial ramifications.
“It puts that whole sector… at risk right now. We don’t want to overstate it, but it is a real concern. It’s not like we haven’t seen bankruptcies (among pulse-handling companies) recently.”