Aerial view of industrial ships on the move going the opposite direction. World at work drone view.
Disruption to supply chains triggered by the impacts of Covid-19 has ignited a worldwide shipping crisis, with prices of shipments skyrocketing due to a shortage of containers. Often headlined as the perfect storm, a combination of pressures has escalated shipping costs to more than four times the normal rate, threatening the stability of businesses that depend on these trade transport lines.
According to the Financial Times, the price of a 40-foot container routed from Asia to Northern Europe has risen from $2,000 to $9,000, while CNBC has reported that the cost of goods transported from Asia to the West Coast of America has increased by 145 percent. At the heart of this issue is the imbalance of global trade, which has been amplified as a result of the pandemic. With China’s trade economy recovering at a rapid rate and an influx in demand for products rather than services, the shortage of containers and soaring freight rates are expected to continue through the first half of 2021.
A Wave Of Pressures
Since July last year, demand for commodities such as medical equipment, home office supplies and computer equipment has forced supply chains to import many products and materials from China to fulfill consumer needs. With the country rebounding from months of suspended trade, this has created an imbalance – exporting approximately three containers for every one imported.
It’s estimated that there are more than 170 million shipping containers across the globe, used to transport around 90% of the world’s goods. Yet, the effects of Covid-19 have left global shipping lines with backlogs and delays due to labor shortages, reduced capacity in logistics systems, congestion at ports as well as quarantined cargo. This means China doesn’t have enough available containers to meet demand. With products piling up in Chinese factories and traders bidding high prices for containers, Reuters claims that “average container turnaround times have ballooned to 100 days from 60 days previously.”
As a result, China is paying premium rates for importers to return the containers, making it more profitable to send empty boxes rather than refilling them. This is clearly a growing problem as the Global Shipping Alliance suggests that “shipping lines are refusing outbound bookings because they want to expedite return of the containers to the Far East.” Bookings are now being accepted based on profitability and strategic importance, and as a result, many small to medium shippers are being sacrificed.
Impact On Global Food Trade
While the globalization of food trade has increased access to a larger variety of goods and opened up trade opportunities, it has become more susceptible to environmental changes and market fluctuations. The shipping crisis is just one example that demonstrates its fragility.
The combination of steep shipping prices and competition for containers has inevitably been felt by the food and agriculture industry, with Bloomberg reporting that food is piling high in all the wrong places. Loading times have been drastically shortened meaning producers are struggling to fill containers fast enough. What’s more, high freight rates have caused retailers to either cancel contracts, bulk buy supplies or delay purchases until prices have balanced.
With the prospect of food shortages escalating prices, increased consumer pressure on the price of food as well as high shipping costs, many buyers are worried about profitability. Purchasing goods at a cheaper rate or selling them at a higher price is not always possible within the existing supply chains so buyers are looking for alternative ways of combating the price fluctuations. In an industry that has typically been reliant on the broker or ‘middleman’ to make the deal, digital solutions offer another path of exploration to help buyers and sellers in the current market.
Digital trading platforms work by connecting buyers with suppliers that are closer to them geographically or with areas where the buying price is significantly cheaper. With either fewer miles to travel or lower initial costs, profitability can typically be maintained and supply almost guaranteed for the ultimate consumer. The buying window can also be reduced because deals can be done remotely without the need for on-the-ground visits. These are done instead by locally situated engagement managers who can provide the guarantees needed by the major buyers. In a world where speed is everything and where the global pandemic has resulted in severe delays to shipping produce, digital solutions are seeking to help the industry remain competitive and responsive to demand.
Transformation In Practice
Digital platforms are in place to help businesses of all sizes. For small businesses looking to find new buyers or suppliers, marketplaces such as Alibaba or connection service providers can assist in helping to secure new business. For larger companies in need of understanding and analyzing the market to make data-based purchasing decisions, data and intelligence providers may offer a more valuable service. However, it is important to ensure the services provided are reliable as the import/export industry is very volatile and information can be fragmented, which can lead to misinterpretation of data.
Ideally, an intelligence service provider directly involved in trading would be in the best position to assist with accurate information. They likely have access to the latest market intelligence from the transactions they are handling and are likely in the position to provide risk-averse buyer/supplier connections and transaction support. An example of this support can be seen in our business when we helped a Mexican avocado supplier to expand their business into 12 new countries with international travel all but banned. Market intelligence, local connections and experience trading combine to make up the characteristics of an ideal provider.
Digital transformation in the food and agriculture industry is already well underway with many platforms available for buyers and suppliers. Yet, trading is one of the most ancient industries and is still dependent on offline practices such as relationship building, physical interactions and trust. Choosing the right support platform will depend on your business goals but you should ensure that a partner can embrace the traditional practices that are still commonplace in the sector in order to capitalize on all opportunities.
Hoshik Shin