The Brazilian agricultural sector is efficient and professional but struggles to move its production to the ports for export. The roads often disintegrate into a mud bath, and trucks can back up for kilometres on the highway to Santos. Ships can wait months if the weather is terrible. The sector has invested heavily in rail freight, and the situation has improved somewhat, but the roads still clog up during harvest season.
During my career, I travelled to Brazil to visit clients, often inland, to talk with producers and discuss crop progress. I also frequently travelled to the US but never got much further than New York City and their annual Sugar Dinner. Admittedly, I worked for Cargill for two years in Minneapolis at the beginning of my career, but that was a long time ago. At the start of this book project, I knew little about the US agricultural export flow from field to port.
Luckily, a friend suggested I talk to Jim Heneghan. When Jim joined Louis Dreyfus in 1998, his first job was to buy and sell CIF (Cost Insurance Freight) barges from the interior of the US along the US River systems, primarily the Mississippi River and, to a lesser extent, the Ohio, and Illinois, and Missouri Rivers, flowing to New Orleans for export.
“US agriculture is blessed to have the Mississippi River System,” Jim told me. “It has thousands of miles of navigable waterways reaching the heart of the country’s grain belt.
“Moving crops to export ports by barge gives the US a tremendous transportation cost advantage over Brazil and Argentina,” he explained. “The cost of moving grains to the ports in those countries is enormous. US farmers don’t have to rely on the road system, like in Brazil, where they must truck grain from Mato Grosso to Santos across some tough kilometres. This cost advantage can ebb and flow with currency changes. For example, a weak Brazilian Real vs the US Dollar can offset some of that advantage, but the US’s natural advantage is not going anywhere.
Jim left Louis Dreyfus in 2013 to become the Global Business Manager for Agriculture at BTG Pactual, Brazil’s largest investment bank, where he was involved in setting up agricultural commodity trading from scratch. He now sits on the board of Greenfield Holdings, a company building the first new grain export elevator in Louisiana since 1979. The elevator will have an annual capacity of 11 million mt. It will receive grains and soybeans, predominately via barge, and load them onto oceangoing vessels for export.
“We are working on the final permits with the US Army Corps of Engineers,” Jim told me. “While developing this ship-loading facility, we have a barge-loading feeder facility upriver in Lake Providence, Louisiana. I don’t merchandise for that facility today, but I follow the facility’s positions and am involved in the company’s risk committee.”
The CIF barge market to New Orleans is the largest US cash market for corn and soybeans. It’s also the primary delivery mechanism for the Chicago Mercantile Exchange (CME) corn and soybean futures contracts. I asked Jim what the main drivers of the CIF barge market were.
“The supply and demand for exports out of New Orleans,” he replied. “You’re looking at the interior supply of crops that can lead to an exportable surplus into the river system for exports. Then there’s a big operational component, everything it takes to load, insure, ship, and manage a barge. We must also watch out for quality and phytosanitary aspects. All of this is risk management.”
“When people talk about exports from New Orleans,” I asked, “does that include all of Louisiana?”
“There’s a mile marker system,” Jim told me. “When ocean vessels come into the river system, they pass the Southwest Pass (SWP), where the captain hands over his ship to a pilot who takes it up the river system.
“Regarding commodity loading within the river system, nothing exists for the first 40 miles because of the delta. The main loading corridor for grain is from mile marker 60 up to about 210 miles north of the sea, above the SWP. A bridge in Baton Rouge with an air draft doesn’t permit large vessels like Capesize or Panamax to go north from there. The main commodity corridor is from Baton Rouge to the south of New Orleans. Call it a 100-mile corridor.
“It’s tidal, but the river levels depend more on the water flowing from the Mississippi River system. At Baton Rouge, you can have a low of 5 feet on the river gage to a high of 40 feet. The tides matter, but the river depth depends more on the upstream variability.
“We heard a lot about low water levels restricting barge activity. Is it something that will happen regularly?” I asked.
“I sure hope not,” he replied. “Low water levels make things difficult from an operation standpoint, loading and shipping barges at the proper draft and ideal economics. The whole system backed up due to the historic droughts in the Southwest and Western Corn Belt. That’s recovered somewhat, and we’re returning to a more normalized flow.
“The river system is also prone to flooding. If you have too much water in the system, you can get flooding on the lower Mississippi River around Cairo, Illinois. That’s a big area with a lot of flow coming in. It can flood portions of Missouri, Arkansas, Tennessee, Mississippi, and Louisiana along the river system. As the water rolls down to New Orleans, the authorities can open spillways to relieve the flow. But yeah, there can be severe flooding episodes.
“Floods will affect the downbound transportation and grain supply to New Orleans. It can be hazardous to take a barge tow downbound. The river authorities will restrict the number of barges you can transit. It can be mitigated to some degree by rail freight, but the system is set up to be barge-served. Typically, 90 per cent of the supply arrives via barge and 10 per cent by rail.
“The upbound move also becomes difficult as it’s a throughput and a backhaul system. If barges can’t get downbound, then they can’t get upbound. But even if they can get upbound, going against the current requires a lot of tow power.
“Then, at some point, if the river levels are high enough, it’s hazardous to have anything in transit as you’re putting projectiles on the water that can eliminate docks and bridges. There have been episodes of tows or vessels breaking away.
“I always imagined,” I told Jim, “that the barges would be empty going back up.”
“You’ll get empty barges upbound, but the barge companies try to do a backhaul if they can – often fertilizers. The downbound is usually grain and coal.”
“Does agriculture compete with coal on the Mississippi for barge capacity?” I asked.
“The barges are different. Grain barges are covered, whereas coal ones aren’t. You have a different barge capacity and fleet for different products, but you still have throughput and need tows and schedules to go up and down. It can be complementary, but it might be competitive at other times. It’s hard for the ag space to move the energy space. It’s the other way around.”
“Could you explain the CIF barge market to me?” I asked him. “How does it work?”
“If you have a farm close to the river system, depending on the time of season and other factors, the best market for your grain is probably for export. You would sell it to a silo operator who would put it on a barge. These river facilities typically don’t have a lot of storage. They’re throughput facilities, like New Orleans, but on a smaller scale.
“If you’re running a river terminal, you will look at the export bid Free on Board (FOB) New Orleans and back that up to the interior, including all the transport and surveying costs and an elevation margin for the grain facility on the river system. The grain barge loading facilities will try to buy enough grain to load up barges and build a program. The barge quantities are roughly 55,000 to 60,000 bushels. Let’s call it 1,500 metric tons (mt).
“If you are in the heart of the Midwest, you may get competitive bids from oilseed crushers, food processors, and biofuel producers. Farmers will say, “What’s my best market today, spot or forward, export or domestic?”
“Louis Dreyfus owns river loading facilities, buys grain directly from the farmers, and loads it on barges. When I worked there, we didn’t buy FOB the river; we covered the whole supply chain.”
“How much weight is typically lost during transport to the export terminal?” I asked.
“Typically, you have a loss of around one-quarter of one per cent,” he replied.
I had read somewhere that as farms get bigger, they are taking over the inland storage role from the trade houses and farmer cooperatives. I asked Jim if that was true.
“Yes,” he replied. “On-farm storage has increased due to good farmer profitability over an extended period. Farmers have become more corporate over time and are now handling assets previously held by the big co-ops or the multinational players. The multinationals have gotten out of that business; regional co-ops and farmers have replaced them.
“The big co-ops like CHS have international operations and do everything from agronomy to services, fuel, distribution, handling, owning assets, merchandising, et cetera, all the way through to financial services. Then, you have regional versions with big co-ops in states like Iowa. Some own processing facilities and crush plants to serve renewable diesel demand.
“The old romantic co-op model where the farmer drives down to the one small co-op elevator in the middle of town is dated. The US is moving more towards a Brazilian model of corporate farming driven by demographics and the search for economies of scale.”
Around 40 per cent of the annual US corn harvest goes to ethanol and DDGS production. With the country developing its Renewable Diesel Programme, I wondered whether its agricultural exports would decline. Would this result in export overcapacity on the Mississippi?
“It ebbs and flows,” Jim told me. “It’s never been structurally oversupplied, and elevation margins are usually positive. The problem is more in the other direction. Elevation margins surge when export demand picks up. It’s not easy to build a new export terminal. You’ve had natural expansion from the existing players, but little new capacity has been brought online.
“We’ve mandated more demand for biofuels, and maybe we will have fewer soybeans and corn to export, but we could increase soybean meal and DDG (Dried Distillers grains – a by-product of ethanol production) exports. Chinese soybean crushers have a duty advantage in importing soybeans and crushing them domestically rather than importing meal,” Jim told me. “But if that ever changed, we could see meal shipping to China rather than soybeans.
“It’s been part of our thought process at Greenfield regarding our new facility. The river system is so expansive there are ways of shipping meal rather than beans. The US system can adapt quite well. If that’s an opportunity to adjust, it can do it.”
“What are the biggest changes you’ve seen in your career in the US domestic market?” I asked Jim. “Is it biofuels, corporate consolidation, or something else?
“The two episodes of biofuels expansion in the US. The first was corn ethanol and, to a lesser extent, soybean oil-based biodiesel with the Renewable Fuel Standard (RFS) starting in 2005. It significantly altered the economics of domestic processing versus export demand for corn. The second is happening now with the expansion of Renewable Diesel (RD). It is increasing the domestic consumption of soybeans and soybean oil.
“Can you tell me three things about the CIF barge market,” I asked, “that everybody should know but nobody thinks of?”
“The first goes back to the delivery system. The CIF barge market is one of the most transparent, liquid, visible agricultural physical markets. It is standardized and well thought out regarding rules, regulations, and trading and has a heterogeneous trading base. It ties directly into the CME futures instruments and is an excellent mechanism for connecting physicals to futures. How the CME corn and soybean futures markets converge with physicals at expiry depends on the CIF barge market.
“The second is that the direction of future price or “flat price” depends on the US balance sheet, distilled down to supply and demand, stocks or stocks to use, which you can quantify, but much of the variability is due to exports.
“The third is that the corn and soybean futures listed on the CME are for US corn and soybeans. The CME futures are a benchmark for world prices but are US corn and soybean contracts. You cannot deliver Brazilian corn or soybeans on the CME futures contracts. Grain in Brazil is fungible with grain in the US, but it’s not deliverable.
© Commodity Conversations ® 2024
This is an excerpt from my new book, Commodity Professionals—The People Behind the Trade, which is now available on Amazon.
