What the escalating cost of sea freight means for Aussie beef: Over the Hooks

The red meat industry in Australia is underpinned by the ability of the processing and export sector to place such a high percentage of our production on export markets while seeking a premium return.

As a high quality supplier that is a long way from most major export markets and having access to an efficient, cost-effective and reliable global sea freight service becomes an essential parameter in the overall export formula.

To deliver our exports to the world has, in past years, required up to 90,000 food grade TEUs or 20ft equivalent containers a year.

The cost of obtaining those containers when you need them and then moving them to your international customer in a timely manner has an important influence on the pricing mechanism that ultimately determines what value is delivered back down the marketing chain to the farm gate.

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Red meat processing has traditionally been a low margin business in Australia and having control over your variable costs like freight rates is essential to long-term survival in an ever changing marketplace.

Both the Australian Competition and Consumer Commission report last year and the AMIC Shipping Report of February this year reported that freight rates have risen anywhere between three to seven fold over the past three years.

Over the past nine to 12 months, those increases have been escalating further.

As an example, a 40ft reefer container for one UK port that cost around US$1750 12 months ago has risen to almost USD$3000 by the end of last year and over US$7000 for February shipment.

Rates vary between carriers but all are heading upwards for what appears to be a decreasing level of service.

Over the past five years we have seen the global container freight service offered to Australia move from an environment of low freight rates and excess shipping capacity to one of surging global demand following the pandemic and tight, if not insufficient, global sea freight capacity and equipment to meet it.

For the meat industry, booking space is increasingly dependent on equipment availability and rates are increasingly only valid for shorter periods.

In such a tight market there are suggestions that smaller exporters can be disadvantaged because they cannot make the same forward volume commitments that larger packers can.

There is also the competing interests of other global trades in Europe and Asia that can be prioritised over Australia for supply of available food grade reefer containers because they offer higher returns.

The surge in global demand has also led to port congestion, impacting vessel scheduling and adding further costs and surcharges.

A recent frozen beef shipment to the US that would normally have taken 25 to 27 days to deliver reportedly took over 70 days including 14 days sitting off the west coast port of Los Angeles waiting for a berth. Such delays have a costly impact on all trades but for chilled beef, it eats up available shelf life at the customer end reducing its value.

Eighty per cent of global container shipping capacity, according to the US White House, participate in three global alliances made up of up to 14 different container shipping companies. None of these companies are Australian so we remain at the mercy of international trends and costs that influence the service provided to Australia.

Interestingly, despite their crucial role in international trade, none of these 14 companies are directly American-owned either, an issue made clear in US President Biden's State of the Union comments on March 1.

We must also appreciate that Australia represents only around one to two percent of global container movements so our ability to influence many of these global outcomes by ourselves is limited.

The US White House comments in both February and March not only identified the impact of escalating freight rates on agricultural trade but also raised concerns about whether questionable use of market power was being evidenced. President Biden has announced an 'historic' agreement between the US Department of Justice and the Federal Maritime Commission to review and address these freight cost issues.

With the average operating margins of the major carriers currently at very high levels, Australian exporters will be watching these events very closely as the cost and reliability of the container freight service to Australia has implications all the way down to the farm gate.

Before 2014, Russia had been an important potential market for Australian beef taking in some years over 40,000 tonnes a year in the preceding decade.

The politics involved with the downing of MH 17 over Ukraine in 2014 and the loss of 298 passengers and crew including 36 Australians resulted in economic sanctions being placed on Russia. Russia's response was to ban a range of food products from those countries imposing the sanctions which included beef and other food items from Australia, Canada , the US, NZ, Norway among others. It has remained that way pretty much ever since.

Sheepmeat products, however, were never put on that list and have continued to trade into the area in small quantities although there are recent reports of container lines reluctant to service the market at present because of the fighting, dropping containers bound for the area into European ports to find alternative destinations.

Queensland beef slaughter along with the national slaughter figures lifted this week as plants returned close to full operation. Low female slaughter percentages continue except in the southern states with higher numbers of dairy cows being processed, a trend supporting beef herd rebuilding.

The increase in overall imported supplies in the US lean beef market (increasing 12,000 tonnes in the latest week) has put pressure on the USDA weekly indicator price for 90cl (chemical lean) Australian and NZ boneless beef at $312UScents a pound ex-dock but trending down.

Australian and NZ arrivals this week were the largest this year with total imported beef shipments so far this year up 33pc.

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