Grain Prices and new barges

“Soybeans trade at a 34-year high,” “Corn trades at an 11-year high,” “U.S. wheat stocks at a 60-year low.”

The boom in grain prices is a combination of strong domestic demand, including for alternative fuels such as ethanol, and strong export demand in the face of foreign production difficulties. While grain prices are expected to decline with more production domestically and abroad, there is a consensus that prices will likely remain high in the face of sustained strong demand.

But what do high grain prices have to do with barge demand?

Strong demand for grain bodes well for the barge sector, particularly exports. In the past, grain exports were regarded as the bread and butter of the Upper Mississippi River barge industry. On the Upper Miss, there were smaller barge operators who specialized in covered hopper barges for grain freight.

Gradually, the grain barge sector has become less distinct, owing mainly to a weakening in U.S. grain exports and a shift of barges to more lucrative sectors such as coal. Barge rates are normally independent of grain prices. However, sustained high grain prices will result in longer barge freight contracts.

The strength of the grain sector is important for long-term investment in equipment. Compared to other sectors, barge grain contracts seldom extend beyond several years. Consequently, grain-related barge investments have been regarded as more risky due to fluctuations in demand and the limited security of relatively short-term grain freight contracts.

But an extended period of strong grain prices should result in a boost in orders for new covered hopper barges. The last big increase in covered hopper barge construction in response to strong grain demand was over 25 years ago. Much of this equipment, if it has not already been replaced, retired or moved out of the grain sector, will need to be replaced very soon. High grain prices should augment new barge construction.

The grain sector has experienced several booms and busts. But it is likely that the current surge in demand and prices will last. This could translate into a new era for the slow-to-no-growth Upper Miss grain sector that has been characteristic for the last two decades.

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