Various factors which will affect the grain markets

Various factors which lead furbish up the tittle grocery storesStopford (2009, p.1) says that forebode is non an impossible task, precisely successful forecasting calls for a bit of smoke and mirrors. Forecasting is all-important(a) because it helps the assembly line to prep ar for the future. This essay get out forecast the forage instill transit trade places by analysing various factors which lead reckon the mite markets. This essay exit forecast for the next 3 months as actual granulate enclothe division finishes in June 2010. The mite considers atomic number 18 unpredictable, with the tonnage requiring shipment hugely dependent on the size of it of harvests in the producing regions, and in those consuming countries whose imports largely depend on the size of their own crops. It is a trade where the flexibility of sea trance really counts. This essay allow look into various supply and motive factors affecting the shipping attention by giving previou s statistical data and then analyse and forecast the data for the supply and demand factors.BACKGROUND OF TOPICThe history of grain trade is as old as the birth of civilisation. International shipment of grain was excessively present during the ancient Greece and roman empires. In the modern days grain commerce plays an important role in the world(prenominal) economy and governments pee a special claim over the grain. Grain has an economic and political wideness and is similarly one of the major issues while policy qualification (Atkin, 1995). Grain in essence means pale yellow, give (Maize) etc. Soya bean is besides considered grain as categorised in International grain code. Soya bean market will non be considered in this essay. Grain is shipped principally my handy size and panamax size ships, precise rarely capsize ships are use. (Atkin, 1995 and Genco Shipping, 2010) in that location are in the first place flipper big players in the grain industry much(prenomin al)(prenominal) as Cargill and they account to almost three-quarters of the world grain shipment (Atkin, 1995). Grain is traditionally exported from America and Argentina while merchandise nations are Japan, middle(a) East nations. Grain trade routes have changed in recent times because of industrialisation and technology advancement. The changes in trade routes are because of availability of instruction from leaders index numbers and traders provoke forecast the grain labor. Some of the key leading indicators are the Baltic dry index which gives the reflection of the freight rates of commodities (Iron ore, coal, grain) that are shipped near the world. Another good indicator for grain is the IGC grain freight index (FAO, 2009). It is similar to BDI but is calculated only for grain cargo. Grain trading information is available on the FAO, Grain council, UNCTAD and USDA websites.Source Noble group, 2010FORECASTING AND ANALYSIS OF GRAIN MARKETForecasting shipping market is con cerned with the futures of the markets as a whole. Forecasting looks at the external environment in which a shipping company operates. The main objective is to examine the world grain market and work a forecast for the next three months. Overall supply and demand factors statistical analysis will be done and how these factors will affect the freight rate markets will be analysed (Stopford, 1997).Prior to making an analysis it is really important to understand the business cycle of shipping industry. As per Stopford, 1997, p.42 it is a process by which the market co-ordinates supply with changes in demand by means of familiar cycle of booms and slumps. When forecasting the shipping market understanding of business cycle is very(prenominal) important. There are four stages of cycle as shown in the diagram (Stopford, 1997). Traders should understand the stages of shipping cycles and accordingly plan their purposes.Stages in dry Market cargo cycleSource Stopford, 1997Key Indicators Baltic Dry index (BDI) is a key indicator for quite a little trade and is an economic indicator for future trades. The business cycle is analysed by using the BDI. BDI shows for all dry bulk cargoes and for all trade routes. Another key indicator is the Grain warhead Index (GFI). It takes into consideration only grain cargoes. It is composed of 15 major grain routes, representing the main grade trade flows. Cape size vessels are not included only handy size and panamax vessels are included in the calculation of GFI. (FAO, 2009)Source FAO, 2009CURVE OF SUPPLY AND DEMAND IN TRAMP transportShipping industry is a derived demand. There are various factors which affect the shipping markets. The supply demand model explains the various factors which affect the shipping industry. The chart below shows the supply and demand make outs in tramp shipping. Demand for shipping grain in short term is in-elastic as grain is a prefatorial necessity. But if the price of shipping join ons then in the longer run the importer looks for alternative options (Volk, 2002). Supply is mainly related to number of ships in the market, and available ships for transporting cargo. ordinarily in liner trade the supply curve starts off with minimum rate and in good market conditions where supply of ships is less than demand the curve rises, but it remains there for a short span (Volk, 2002). Analysis of these supply and demand factors is very essential to understand the shipping market and prepare a forecast.Source (Volk, 2002).The graph shows the relationship between demand and supply in grain trading. Increase in demand during bad market conditions (D1 to D2) does not have influence on freight rate (P1 and P2) as sufficient tonnage is available. The affix in demand (D3 to D4) leads to a significant rate increase (P3 to P4) (Volk, 2002).ANALYSIS OF DEMAND SIDE FACTORSThe world economy The world economy plays a very important role in influencing the ships demand. There is a very clos e relationship between countries becoming wealthier and increase in demand for grain transport by sea. Hence understanding of the global economy is important to judge the edit outs in the grain trade. (Stopford, 1997).The world GDP is increasing every year and as per statistics from IMF in 2008 the world GDP increase by 3.0 % and in 2009 it decreased by -0.8%. In the emerging economies like China 8.7% and India 5.6% GDP upgrade is enormous and the countries are developing fast (IMF, 2010). As can be seen from the diagram below, as the countries develops economically the demand for commodities traded by sea increases. It is a cyclic process where the increase in seaborne trade helps the countries to economic growth and the world markets grow. More over globalisation has also resulted in growth of seaborne trade. (Stopford, 1997).Source Author generatedChina and India also have a very gamey population. The capacity of developing countries especially China and India to consume basi c foodstuff such as bread have increased. Hence it has at once alter the global consumption of grain and thus the increase in trade (Atkin, 1995). As countries get wealthier they also tend to change their dietary patterns. The demand for burden is increasing every year. This is directly affecting the coarse grain trade (USDA, 2008). Almost 70% of coarse grain consumption is in the form of wight feed (Atkin, 1995).Seaborne commodity trades Grain accounts to about 7% of the world seaborne trade as per Clarksons (2008 cited in Scott, 2010). Grain trade is driven by business and consumption trends in different areas of the world, by the topical anaesthetic weather conditions and crop yields and changing pattern of food consumption. Grain is also used for making bread or pasta or feed to animals to produce meat (ICS, 2004). Grain is grown very widely around the world. In the northern cerebral cerebral hemisphere there is the States, Canada European union and in the southern hemisp here there is Argentina and Australia. Hence harvests are crops reach seaborne trade throughout the year (Genco Shipping, 2010). Most of the grain grown in China and India is used for local consumption and because it does not affect the seaborne trade. Countries like USA produce grain for exporting stock up the grain in SILOS which also helps the grain trade to flow throughout the year (Atkin, 1995 and IGC, 2010). Worlds grain trade has increased over the long time, as per current data the trade has increased from 215 million tons in 2005/06 to 239 million tons in 2007/08 (FAO, 2009).Source Clarkson 2008 cited in Scott 2010.There are seasonal variations due to climatic conditions and difference in productivity of soil (Atkin, 1995). Seaborne grain trade is also affected by inwrought calamities, earthquakes such as one in Haiti in 2010. Other Factors such as a drought or flood in China may force the country in the one or other year to import grain from the USA (Volk, 2002). Over the years the grain production is associated with instability in production. This is result of extensive spread of high yield seeds and cultivation technology. This has resulted in farmers in different regions are exposed to similar problems like fertiliser prices, crop disease (Atkin, 1995).The seaborne trade of grain also depends upon which dismantle of the world is good harvest of which type and quality of grain (Atkin, 1995). Majority of the produced grain crop is used for domestic consumption as is the case with India and China. Countries such as USA and Australia produce grain only for exporting (Atkin, 1995). As per statistics from IGC summarise grain production for year 07/08 was 1697 million tons out of which only 239 million tons was traded in the world market (FAO, 2009).Grain statistics is calculated for the crop year starting from June every year. Hence the data available for forecasting will be only till June 2010 because of the harvest season. (Scott, 2010) As grai n production depends upon so many factors it is difficult to get an outlook in future because of the current growing season in the northern hemisphere which is influential in forecasting of grain. International grain council publishes its grain forecast only after June every year (Scott, 2010).Average haul Demand for sea transport is directly related to distance over which the cargo is shipped. Sea transport demand is measured in tonne mile.Ton mile = Tonnage of cargo shipped x Average distance over which it is transportedSource UNCTAD, 2009, p.30As seen from the above table the world seaborne trade for grain in ton-mile has increased over the years from 475 billion ton-mile in 1970 to 2,029 billion ton-mile in 2008. The average haul for grain has increased over the years which are directly affecting the demand for ships (Platou, 2010). becharm of grains and soybeans were also longer in 2009, mainly due to increased Asian sourcing from Atlantic exporters. (Platou, 2010, p.22).Polit ical events and Agricultural policies Political events indirectly affect the demand for transport of grain cargoes. The impacts of wars will affect the trade for a short term. Political embargo such as, The grain embargo, introduced by the United States on the USSR after the violation of Afghanistan, reduced Russian grain supplies by about six million tonnes in 1979/80. This affected a change in the grain trade as Russia had to buy grain from other nations such as Canada, Australia and EU (Tarrant, 2002).Agricultural policies in countries also affect the world grain market. Policies make directly affect the production of grain and it also protects the farmers from the world market conditions (ATkin,1995). India had imposed a grain export ban because it wanted to use the produced grain for its internal market. India which is the indorsement largest producer of wheat is now planning to lift the ban on exports because this year wheat output is going to be more than required for local consumption. Hence in the interest of the country India will open its grain markets to the world. (Hellenic shipping news, 2010).Key players in grain trade There are five major international grain trading companies. These players account to three-quarters of the grain shipped internationally. Hence these companies have the power to manage the physical flow of grain from farmer to consumer (Atkin, 1995). The shipping part of grain is very complex and is also very risky. Grain is traded extremely widely and hence informational network need to operate on a global scale. The big grain companies have information systems which provide them information from every country. Their agents are located in every significant grain producing, exporting, and importing nation, monitoring the weather, economic trends, crop conditions and political growing. Hence the economics of scale deter new entrant from entering into the grain market. Hence these big companies can be influential in affecting the markets (Atkin, 1995).ANALYSIS OF SUPPLY SIDE FACTORSThe supply side factors mainly consist of the ships which are available and operating(a) in the market. The supply of ships is mainly controlled by four decision makers, Ship owners, accepters, bankers and various regulatory authorities which make rules. The supply of shipping capacity depends upon the judgment made by these players. To understand this first we will discuss the supply side factors and how they are influence by the freight rates.World waver Historically grain cargo is carried onboard general cargo ships. By the late 1950s bulk carriers appeared into the shipping market. Eventually there where ships make which could carry grain cargo. These ships construction was such that they had self trimming holds which would make them safer to carry grain in bulk. The use of large bulk carriers was instrumental in growth of bulk trade. For grain rapture handy max and panama ships are normally used, but on some occasions ca pe size bulk carriers are also used (Stopford, 1997). There has been rapid change in the size of the bulk fleet and with new technology and designs such as self un-loaders coming up investors have to make complex decision when ordering new ships. As can be seen from the table the bulk merchant fleet has grown from 276 m dwt in 2000 to 418 million dwt in 2009 (UNCATAD, 2009). The panamax ships have increased from 65.4 m dwt in 1999 to 121.1 m dwt in 2009 while the handy max market has increased from 45.3 m dwt in 1999 to 91.9 m dwt in 2009. (Clarksons, 2010 cited in Scott, 2010)Source (Lloyds Register Fairplay cited in UNCTAD, 2009)Fleet productivity Fleet productivity is calculated to understand the condition of the current markets. The fleets operating performance changes in response to market conditions such as E.g. If market is favourable then a grain carrier ship after complete its loaded navigate can carry cargo during its return voyages. This will increase the productivity of ships. As can be seen from the graph below the ton-mile per deadweight of the bulk fleet has not changed over the past couple of years. This is mainly because of good market conditions in the last three years.Source UNCTAD, 2009, p.94Ship structure production New ships added into the fleet plays an important part in the supply and demand markets. This helps to level out the demand or it can also cause flood of ships. New ships added into the market do not construct a short term effect but it is a long term effect. For ships to be built and to deliver time taken is as much as from 6months to 4years. Hence orders for ships are placed as per the estimate demand for cargo. During the bulk carrier grammatical construction boom in mid-1980s bulk carriers had developed a dominant role in shipbuilding, which resulted in overproduction and surplus of ships. The dry-bulk market new building market has been comparatively stable as compared to the tanker markets (Stopford, 1997). The gra ph below shows the delivery of new build ships over the years has increased and was at its peak in 2007 and 2008 when the market was booming. This also shows that investors can be driven by market sentiments and buy ships in the current booming market at sky high prices and fail to understand that ships will be delivered after 2 to 3 years time.Source UNCTAD, 2009.Scrapping The fleet size also depends upon scrapping and loss of ships. Scrapping also balances the size of fleet in the market. Scrapping of ships is mainly depended upon the market conditions and also factors such as age, scarp prices, current earnings of ships, and change in regulations (Stopford, 1997). Scrapping of ships is normally a decision made in interest of the business. The futures market is also taken into consideration when making such decision (UNCTAD, 2009). As seen from table below percentage of scrapping of ships was very less in the booming period from year 2005 to 2008 as compared to years 2000 to 2004. This clearly shows that scrapping is mainly decided according to market conditions.Source UNCTAD, 2009. * Vessels over myriad dwtFreight rates Freight rates influence the supply of sea transport. The shipping business depends upon freight rates and it is the ultimate market regulator. (Stopford, 1997) In grain trading freight rate plays an important role in the marketing chain of grain market. Grain is a bulky and low value commodity, hence transportation costs account for a substantial part of the price of grain. The ocean freight rates for grain are variable and volatile. They are not co related with the price of grain. This is mainly because grain prices cycles are mainly driven by weather conditions, agricultural policy and general economic development (Atkin, 1995). While freight rates are derived by market conditions, supply and demand factors. One of the main factors of grain market is unlike other cargoes where geographic regions are defined grain imports are done by a ran ge of countries with varying capacity. Hence grain markets are mainly spot charter markets, where freight rates are fixed on spot. Normally in grain trading tramp steamers are hired on a voyage charter basis. Freight rates are determined by the overall balance in supply/demand of vessels and cargo (Atkin, 1995).FORECASTING OF GRAIN workWorld economy The worlds GDP as per statistics from IMF shows 3.9% increase for the year 2010 (Clarksons, 2010 cited in Scott, 2010). This is more due to the growth in emerging economies which is expected to rise by 6 percent. Advanced economies are expected to rise by 2% in 2010. Due to strength in demand from emerging economies commodity prices are expected to rise a bit (IMF, 2010).Global Population is going to grow at an assumed average of about 1.1 percent per year. Population in developing countries are going to increase more than the population in the developed countries. With fast industrialisation and urbanisation of developing countries and increase in raw population in developing countries the demand for grain is going to see and upward trend (ERSUSDA, 2008).Seaborne commodity trade Grain production will be mainly dominated by USA followed by Argentina which is the second largest and then Canada and Australia. The world main grain exporters and importers are shown in the graphs below. Exports of grain will be dominated by USA where as Imports will be mainly from the Asia/Pacific region followed by Latin America Africa and put East (Genco Shipping 2010 IGC, 2010). As per International grain council for the crop year 2009/10 wheat and coarse grain trade may fall by 17.6 million tonnes or 7% to 230.8 million tons (Scott, 2010).Source IGC, 2010Source IGC, 2010Source IGC, 2010Wheat and Corn (Maize) are the major grains which are traded in the global market and they account for almost 89% of the world grain trade (IGC, 2010).Wheat and Coarse grain outlookWheat crop production has stirred a record high in Russia, Algeri a and Australia. Also world wheat stocks in the five major exporting nations have forecasted an eight year high. As per estimates wheat imports will be reduced due to good harvest in importing countries such as Middle East and North Africa (Scott, 2010).Worlds corn harvest will remain unchanged for the year 2009/10. The projected corn trade for 2009/10 (October-September) is at 84.9 million tons which is lot reduce than 2007/08 which is ci million tons. Imports by Vietnam and China are increased slightly but it is not going to affect much in the world trade (USDA, 2010). The corn trade is going to increase because of more shipments to Canada, Brazil and Syria. Exports from Argentina and Brazil are going to increase due to good harvest. This is going to affect the USA corn exports which will be less this year (IGC, 2010). Moreover USA is using corn for industrial purpose to produce ethanol which will also have an impact on its corn exports (USDA, 2010).Grain imports into Asia (Exc luding Japan) are also expected to be slightly lower in 2009/10 by 2%. Pakistans imports may fall by almost 87% as compared to last year due to good domestic harvest (Scott, 2010). European Union imports will also be down by 20% because of good domestic crop availability. Middle East imports are also expected to be lower by almost 19% (Scott, 2010).Japan imports over the years are showing a downward trend which will continue for the remaining part of the year. South Koreas wheat and coarse grain imports may be 9% higher as there is increase in demand for feed grain (Scott, 2010).Overall wheat and coarse grain trading is going to see a decline till the end of June 2010. This effect is mainly because of less demand for wheat in the market.As per Scott (2010) global seaborne trade for grain will pick up from Mid-2010 onwards. Domestic crop in the northern hemisphere is the key influencing factors, because of the current growing season it is very difficult to forecast grain trade after June 2010.Policy effects Due to rising food prices of grain over the years some countries have adopted protective policies to support their local farmers and their consumers. Some exporting countries have made restrictions on export of grain to support their internal market. Argentina, Russia and Kazakhstan have imposed tax on grain especially wheat and corn exports. China went a step however they eliminated the subsidy which was given for grain exports and have levy a tax for grain exports. Argentina and Ukraine have established quantity restrictions on wheat exports.As export countries have taken protective measures to reduce rising grain prices in 2008, importing countries have also taken measures to reduce grain prices. Countries such as Indonesia and Serbia have reduced their import tariffs on wheat imports. This decrease in export quantity by countries and import countries subsidising tax on imports will create a surge in demand in grain market. But rising fuel cost for shipp ing grain will increase the price of grain (USDA, 2008).World fleet As per Clarksons the worlds fleet is going to increase by 11.4 % in 2010 as compared to the last year. The handy max market is going to increase by 14.2% in 2010 from precious year and the panama market is going to increase by 7.59% in 2010. (Clarksons 2010 cited in Scott, 2010) This is going to create and oversupply of ships in the market. Due to the large number of ships in the new building order books, but low freight rates and demand for ships it is acquire increasing difficult to project the growth of fleet ahead (Platou, 2010). Port congestion is not likely to affect the grain market in the current economic conditions.Source Platou report, 2010As seen from the graph the oversupply of ships and falling demand is affecting the utilization rate of bulk carriers. As most of the grain trading is done in the spot market the oversupply of ships is going to affect the freight rates (Singh, 2009). The handy size marke t will not be affected by much because the growth of handy size is limited. The number of Handy size ships built in 2010 will be higher but that is likely to be offset by scrapping of ships (Clarksons 2010 cited in Scott, 2010). Ship Owners are also converting single hull tankers to bulk carriers because of changes in regulations in tanker markets. This is also going to increase number of ships in the market (Scott, 2010).Shipbuilding As per Clarksons new ships joining the world fleet are going to increase the fleet by almost 61.9 million dwt by 2010. This is a very significant rise in deadweight to the world fleet (Clarksons cited in Scott, 2010). The ships whose delivery was delayed in 2009 are also going to hit the shores by 2010. Hence that may also result in rise of tonnage (Fairplay, 2010) As per estimates the new building which has been ordered have to be cut back by 40% so that the supply will balance the demand side by 2012 (Platou, 2010).Scrapping As per Clarksons (2010) c ited in Scott (2010) an estimated on 11 million dwt tons of ships will be scrapped in the year 2010. But scrapping of ships is mainly a function of earnings hence it will mostly depend upon the freight rates earned by ships (Platou 2010). In the handy size market in 2009 5.3 million tons was scarped and this trend is going to follow in 2010. (Scott, 2010).CONCLUSION/RECOMMENDATIONSThe grain trade is going to experience a decline in the crop year 2009/10. This decline is mainly because of good wheat harvest in most parts of the world, coarse grain trade will be following previous trends. In asset to good harvest the surplus of ships in the market is going to lower down the freight prices in the grain spot markers. Rising fuel prices may have an effect on freight rates which may offset the cheap freights offered by ships. In the near future grain trade routes will remain the same. The production of ethanol from corn will affect the grain exports from USA, but good harvest in Argentin a and Brazil will repeal the effect.The world wheat production has a current surplus in the market which will lower down the price of wheat. Hence it is likely that in spite of surplus wheat and less demand from importing countries, importing countries may take advantage of low prices and will import more wheat and increase their wheat stock.