The Impact of Ocean Freight Rate Fluctuation on Wheat Flow

The global economy is increasingly defined by access to international markets, with reduced barriers to trade between many countries. Continued reduction in the costs of moving products both within a country and around the world is crucial for modern business to remain competitive. International trade in grain is no different, and presents its own unique challenges for study in a Canadian context. Ocean freight rates for grain have recently been very unstable. After a long period of low freight rates, capacity became limited in 2003 and 2004 more than tripling freights rates. Although freight rates have subsequently declined, the increasing dominance of containerized ocean traffic may perpetuate the recent instability in bulk freight rates. The impact of ocean freight rates on Canada’s competitiveness in the grain markets is poorly understood. The theory for the flow of commodities over space has been well studied in the context of trade and while there have been a number of studies concerning the spatial nature of grain handling and transportation in Canada. However, to date there has been minimal effort to analyze ocean freight transportation prices and their impact on wheat flows from Canada. The purpose of this study is to analyze the impact of ocean freight rates on international competitiveness of Canadian wheat. To analyze the impact of ocean freight rates on Canada’s competitiveness a spatial, product-differentiated, equilibrium model of international wheat market is developed in this research that allows for two way trade and explains the linkages among the various locations of production and consumption. The model incorporates changes in ocean freight rates and the geographical distances with non-homogeneous wheat originated from different wheat exporters. The model is used to examine the potential impact of changes in freight rates on Canada and other main players in world wheat market. The model is a tool to compare the price and quantity changes and compare the comparative advantages and disadvantages that are created by changes in wedges due to freight rate fluctuation. The result implies that shorter geographical distances and lower freight rates do not necessarily result in increasing export to the regions with lower per unit freight rates. This is why before any decision making, it is reasonable to adopt such a tool that is capable of measuring the reactions to price changes that are associated with freight rates considering different demand and supply parameters