The shipping industry is changing in 2001 as demand increases for US products. Last year, carriers arrived laden from Asia, but sometimes returned empty. As a result, west-bound shipping rates were lower than east-bound rates in the Pacific Rim.

This year, US agricultural exports are projected to increase $2.1 billion-mainly in Asia and the Western hemisphere, according to the USDA's Economic Research Service. Additionally, economic growth in Asia and Russia are expected to cause an annual growth in cargo of 3% to 5% despite a USDA estimate of overall global gross domestic product growth of just 3% to 3.5% for 2001 (down from 4.0% in 2000). That stiffens competition for ships and containers, possibly increasing shipping costs. Availability is further tempered by the cyclical nature of the business, which includes crop quantities and harvest times as well as holiday demands.

Cycles & Logistics

"The problem is lead time," explains Roy Warren, president and CEO of China Premium Foods, in North Palm Beach, Florida. Plans for shipping his product-specialty sandwich crackers-from the US to Shanghai, People's Republic of China, in time for the lunar new year [January 24] began a few weeks before Thanksgiving. As he explains, "It takes three to four weeks to get into the queue to have the product produced [on the East Coast], one week to ship it to California, three weeks to cross the Pacific and about three days to clear customs." That's about five weeks to get cargo to a ship and about nine weeks to get product to a local distributor.

Perfecting this timing is important because fleet size and the demand for certain types of containers fluctuate. The necessary carriers or containers, therefore, may not be available on demand. For example, before its merger with Lauritzen Reefers A/S on January 1, Cool Carriers' base fleet fluctuated between "45 to 50 vessels, depending upon time of year," according company sources. Likewise, humidity-controlled containers were in high demand last year, providing new marketing opportunities for grapes and other produce. As yet, demand exceeds availability, according to the Agricultural Marketing Service at the US Department of Agriculture. As another example, "Reefers are in high demand in the summertime, and they can become very expensive," says Jack Wiley, vice president of logistics at Agribuys in Torrance, California. Typically, these containers are booked to coincide with anticipated harvests. A late or early harvest could cause problems, Wiley emphasizes.

Bonny Doon Vineyard in Santa Cruz, California, avoids the expense and availability issues of refrigerated containers by shipping wines to Europe in the spring and autumn. As Ted Pearson, director of sales explains, "The heaviest cargo goes in the bottom of the ships. Wine is heavy, so it goes in the bottom, where it's cooler." The same method, in winter, could unduly chill the wine, spoiling it. Likewise, in summer, cool temperatures can't be ensured without special units. So spring and autumn are ideal shipping times.

Costs

Pearson says it costs about $200 to air ship two cases of fine wine, compared to "$3 to $4 per case" for trans-ocean freight. East-bound cargo goes through the Panama Canal. "Shipping costs are negligible on water, but about $5 a case to go overland to New York," he says. Costs can be reduced if containers are hand packed, but then labor and weight comes into play, Pearson says. "Containers can hold 22 pallets with 55 cases per pallet." Hand-packing can add 200 cases, but makes the containers too heavy for highway transport. "We don't use it," says Pearson.

China Premium Foods trucks crackers across the US before shipping them to Shanghai. "[For us,] it's cheaper than air and faster than using the Panama Canal," Warren, says. From Hong Kong they're transferred to smaller ships or barges and shipped to Shanghai, where local transportation takes over. Door-to-door shipping is arranged by China Premium Foods, which also provides transportation throughout China.

Third Parties

The goal of providing "one-stop shopping" is spurring Agribuys to move toward "one-stop shipping" this spring. A third party arranges all the shipping (including cross-country), handles drayage and its documentation, any consolidation, shepherds the cargo through customs, handles all the paperwork, and provides a breakdown of costs per leg of the trip. For Agribuys, it's a matter of efficiency that lets it expand its customer base without expanding its staff and internal systems, Wiley explains.

The move to third-party logistics firms is benefiting food and beverage firms. "It's a matter of efficiency. With third parties, companies don't need large shipping departments," says Philip Nelson, head of the food sciences department at Purdue University in West Lafayette, Indiana.

The other benefit is purchasing power. "A company with a $100,000 to $10 million freight budget won't have Ryder's negotiating and purchasing power [of $2.6 billion] in transportation management," says Sergio Retamal, general manager, Asia Pacific transportation management for Ryder Logistics & Transportation Solutions Worldwide, based in Ann Arbor, Michigan.

Large third parties such as Ryder optimize modes of transportation, shipment size, and frequency to ensure the most cost-effective and reliable delivery for their customers, and also consolidate freight. That combination helps clients sidestep the problems of availability and minimum-quantity commitments (MQC), Retamal explains. Since 1984, signing MQCs for a specific number of containers has been a standard practice. Typically, after the MQC was reached, the shipper continued to tender cargo at the negotiated rate.

That practice changed last year. According to the Agricultural Ocean Transportation Coalition (AOTC), "Carriers have begun to refuse to carry cargo after the MQC has been met," because of an increasing demand for space. Thus, the minimum quantity of containers in an MQC may also become the maximum number of containers a shipper will accept if they can get higher rates elsewhere. Above the maximum-volume commitment, expect to renegotiate rates. The solution is either to work with a third party or, as the AOTC says, to commit to the number of containers that exporters realistically expect to export.

As a benefit, carriers have been reluctant to seek liquidated damages when the minimum commitment hasn't been met, thus encouraging firms to more accurately estimate their amount of cargo. Instead of seeking damages, expect to amend either the terms or duration of the contract.

The Northwest Passage

"Ease and speed are the two biggest concerns in shipping," Pearson says. Logistics companies take care of the "ease." The Northwest Passage may take care of the "speed." This strait through the Canadian Arctic currently is unnavigable most of the year because of ice. But the ice has been melting earlier each year for the past few years. Scientists at the University of Washington, among others, estimate the Arctic ice pack has lost some 40% of its volume since it was first measured in 1958, shrinking from an average thickness of 3.1 meters to 1.8 meters. If the polar ice pack continues melting at its current rate, a year-round navigable route may be possible within the next 20 years. Such a passage could cut the voyage from Tokyo to London from 14,665 miles to 7,997 miles.

Don't expect the Northwest Passage to be readily available, even if it opens. Major surveying would be required to update navigational charts, ships would need ice-protection reinforcement, and countries would need to agree upon sovereignty. In 1988 the US and Canada agreed that US icebreakers could cross the passage, but only after Canadian approval, on a case-by-case basis. That's probably not the last word. wt