By Peg Zenk


CHS shipping From the Spring issue of C Magazine by CHS

Through a decade of ocean freight upheaval, CHS adjusts to improve efficiency, reduce risk. 

Low ocean freight rates in recent years appear to have provided smooth sailing for grain exporters. But, as with other global businesses, the shipping industry is still reorganizing after the 2008 financial crash, when global buying stagnated and the bottom fell out of the shipping market.

Since then, some shippers have trimmed fleets and replaced outdated vessels to become more efficient, while others have gone out of business.

Now, after nine years of readjustment, there are signs the industry is stabilizing, with a rebalanced global fleet size and economic growth in major world economies, including China.

But shippers aren’t the only ones who have streamlined their operations. CHS and other grain exporters have reset shipping processes and renovated facilities to accommodate evolving transportation demands.

Ocean Freight Rate Extremes
In the years leading up to the global financial crisis in 2008, China’s demand for raw materials grew rapidly, with that country using three-fifths of the world’s shipped iron ore and one-quarter of all shipped coal. Ocean freight rates boomed to an all-time high of 11,793 on the Baltic Dry Index (BDI) in May 2008, more than 12 times the current index value. BDI tracks the cost of shipping bulk commodities such as iron ore, coal and grain.

“Iron ore comprises the most tons of any commodity shipped over the ocean, so the iron ore market and the BDI tend to move together,” says Justin Cauley, grain marketing ocean freight manager for CHS. “From a shipping standpoint, when it comes to getting U.S. grain to other countries, our competition is other commodities.”

By the 2007–2008 season, shipping demand was so great that vessel owners could set their terms, including raising demurrage (the fee charged when a vessel is at a terminal too long). “Demurrage got as high as $100,000 per day per vessel, compared to today’s rate of $18,000 to $20,000 per day,” Cauley explains.

That rapidly growing shipping demand spurred orders for new cargo ships, which typically took four to five years to build after the order was contracted. Many of the new ships were still being built in shipyards in Japan and China when economies crashed in 2008, explains Mike Klein, senior ocean freight merchandiser for CHS.

“Most of those new vessels have entered service in the past decade, requiring shippers to scrap many older vessels, some only 15 years old,” he says. “The average vessel life used to be 20 to 25 years. In recent years, shippers have scrapped an average of 300 vessels a year,” adds Klein.

Bulk vs. Containers
Most commodities are shipped by bulk vessel, says Cauley. “About 90 percent of all grain is shipped bulk, most on Panamax cargo ships that carry about 52,500 tons each. There are about 10,500 bulk ships transporting commodities around the world, compared to 5,200 container ships, which typically carry manufactured goods.”

The roughly 10 percent of marketed grain that CHS ships via container includes specialty grains, premium grains and DDGS. “And we might ship grain by container to a new customer who wants to try a smaller amount before committing to a vessel or to a buyer who can’t afford a full vessel of grain,” says Cauley.

“DDGS is the commodity we ship the most by container. Because it’s lighter than grain and fills a container more completely, it’s a more economical option than shipping bulk,” he says. “Shipping out of the two CHS ethanol plants near Chicago, we can take advantage of good container supply because of all the inbound containers arriving there full of consumer goods for retailers such as Walmart.

“When we’re sending DDGS to places like China and Vietnam, we’re incentivized to fill containers as the backhaul to all the manufactured goods those countries ship here,” he adds.

Cheaper ocean freight rates support international grain sales, and CHS is always working to find new markets, as well as improve transportation and handling efficiencies wherever possible, says Klein. “Some of these strategies were in part developed from lessons we learned during the highfreight-rate years.”

Strategic Changes
Broadening export markets. In the past decade, CHS has started doing business with more customers in Southeast Asia, including Indonesia and Vietnam, along with increasing sales into South Korea and Taiwan.

Managing counter-party risk. Choosing to work with the wrong vessel owner can lead to poor shipping performance, says Klein. “We research each owner carefully to make sure the vessels and service are reliable. We also avoid getting overexposed by doing too much business with any one shipper.

“At freight rate highs in 2006 through 2008, market volatility was high and our shipping positions could vary by half a million dollars in just two to three days,” he says. “Freight markets aren’t as volatile now, but we still have to manage risk. At any given time, we have about 50 vessels of grain being loaded or on their way to customers.”

Increasing export space. When freight rates were at record highs, one of the biggest limiting factors impacting CHS grain export volumes was limited export terminal space. To address the need, in 2013 CHS undertook a two-year project to significantly upgrade the TEMCO terminal at Kalama, Wash., that it operates jointly with Cargill. Completed in 2015, improvements tripled the previous capacity through increased storage and rail facilities and bigger, faster ship-loading capabilities. The terminal now loads between 1.2 million and 2 million bushels of grain every 24 hours.

Local Impact
Changes in global grain shipping have filtered down to the local level for many cooperatives. “It’s all about speed and volume,” says Ken Blakeman, general manager of CHS Primeland based in Lewiston, Idaho. “Winter wheat is the number-one crop in our area and we ship most of it by barge to Portland for export to Asia.”

The number of companies in the Portland grain trade has shrunk over the years, he says. “We have fewer companies to sell to and those remaining usually want to move more tons at a time.”

For cooperatives such as CHS Primeland, that has meant upgrading elevators and closing or tearing down older ones. “We need to have loadout facilities that can quickly get grain to the port because that’s what buyers expect now,” says Blakeman. “They want to buy enough grain to fill a vessel and are willing to pay a premium for it.”

Having fewer elevators in the country means some farmers have to haul grain farther, he notes, “but our upgraded elevator facilities include faster unloading for our farmers.”

For the cooperative, making larger sales requires accumulating larger positions and that increases risk, Blakeman says. “It helps that we’re able to ship grain to Portland almost year-round. But we’re always tight on space and, come the end of June, we need to be at the bottom of our bins to make space for the next crop.

“Ten years ago, we could store 1 ½ years’ worth of crop, but now we’re down to just a year, in part because the cost of building new storage has increased significantly,” he says. “Instead, we’re focusing on moving grain faster.”

Nearly 10,500 bulk ships transport commodities around the world.

Where Old Ships Go to Die
After nearly a decade of placing orders for new ships, overcapacity led the global shipping industry to scrap about 1,000 vessels of all types in 2016. That’s enough ships to haul 52 million metric tons of cargo.

Last year, at least 175 container ships were scrapped after 18 years of use on average. In the first few months of 2017, more than 50 Panamax vessels were retired and replaced by new, larger Panamax ships that were built to fit through the recently enlarged Panama Canal.

Where do all those rusting giants end up?

After stripping some materials for recycling, including steel, wood and glass, they’re sent to scrap yards. About 85 percent of those scrap yards are along coastal areas of Bangladesh, China, Pakistan and India, where dismantling them has become a lucrative business for governments, thanks to cheap and abundant labor and minimal environmental protection laws. They’re dragged onto beaches, cut into pieces and sold, with much of the steel going to China.



0–4 years old 44%

5–9 years old 26%

10–14 years old 14%

15–19 years old 11%

20 years old 6%


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