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Thursday, August 17, 2017

Australia: A lucky country because of our neighbours

By Andrew Whitelaw  |  Source: Baltic Exchange, ACA

Key points

  • The Baltic dry index is an indicator of bulk freight.
  • We have reached the highest level since the 20th April.
  • A rise in July/August is unusual, and is due to increased Chinese commodity demand.

207-08-17 Grain Fig 1

207-08-17 Grain Fig 2

207-08-17 Grain Fig 3

In many ways, Australia is the lucky country. We’ve golden soil and wealth for toil. One factor which the famous Scottish composer Peter Dodds had not thought of when he wrote the Australian anthem; Neighbours. We have a small population therefore we have to look both home and away, luckily, we have a vast population on our doorstep. In this analysis, we take a look at the bulk freight situation, and our geographic advantage.

The Baltic Dry Index (BDI) is an indicator of the moving bulk goods, and is based on the daily hire rate. The BDI is important for a number of reasons. Firstly, it is considered a leading economic indicator as the cargoes typically transported by bulk vessels are commodities requiring further processing (iron ore, coal, grains etc) to create an end product, thereby giving an insight into future economic performance.

Secondly, and most importantly for grain producers, is the BDI will provide an indication of the cost of moving surplus grain to importing countries.

In figure 1, the BDI since the turn of the decade has been plotted. In recent weeks, the index has risen sharply. Although still at the low end of the scale, the BDI has pushed through the 200-day moving average. This BDI has achieved 1207, which is the highest since the end of April. The largest influence on the BDI has been an upsurge in Chinese commodity demand.

This current strong demand is quite unusual, as bulk sea trade is typically quiet in the June-August period, (figure 2). It is highly likely that the BDI would continue to rise through the coming months as China continues to import various industrial commodities at a strong pace. Although unseasonably strong, we are still at the low end of the scale, especially when we look back to the heady days of 2008 (figure 3).

What does this mean?

For the most part grain can easily be transported around the world. If one origin is too expensive/unavailable, another can take its place.

When freight prices are low, it is cost effective to move grain from origins to destinations which traditionally would be too distant to make economic sense. In recent years low freight rates have reduced the benefits of geographic advantages.

If demand in China continues to improve, and freight rates find a foothold to improve, then we may see another factor to help assist strengthen Australian basis. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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