Backoffs & Demurrage in Rerouting Freight

Shapeshifting global shipping routes, due to droughts and wars, represent a major threat to commodity prices. Let’s explore supply chain costings.

According to an excellent analysis by Supply Chain Dive, “A new wave of supply chain shifts is spreading…decisions have accelerated as cost pressures, policy incentives and new ways of thinking… influence supply chain resilience strategies.” Consider 3 stark examples playing out in real time right now, forcing fast global supply chain adaptation, and what combined it all means to consumer prices.

• Low water levels in the Mississippi

• Drought in the Panama Canal

• Conflict in the Middle East and Suez Canal

The impact of higher costs may be lagged in price changes seen by end-use consumers, but they will have to show up eventually because they are being incurred right now. Some will directly inflate prices across supply chains, and some are having indirect impacts, namely international market demand destruction.

Mississippi Basin

For several years now, low water levels on the Mississippi River have influenced U.S. barge rates and capacity, in response to rainfall levels. In the worst cases, moving barges has become impossible forcing products into more expensive trucks and rail cars, or preventing exports entirely.

The cost pressure that this places on shippers tends to back up to the farm gate, since the U.S. is an exporter of grain and an importer of fertilizer. A ‘backoff’ is a trading calculation that takes the purchase price at one point, say ammonia arriving in February at the U.S. Gulf, and adds the ownership and transportation costs (interest, storage, freight, overhead) to come up with retail fertilizer prices at farm stores across the Northern Plains.

The impact of basis adjustments on commodity pricing is pretty reliable, kind of like inflating and deflating a balloon. The more costs are puffed up, the bigger the spread between point A and point B, putting opposing pressure on cash prices at both ends.