Being a sparsely populated island within an island, Western Australia is dependent on efficient and effective trade routes for our agricultural products to find customers. For low value bulk commodities like wheat, this involves bulk vessels. For higher value products like frozen lamb, container vessels are the transport choice and, for high value perishable goods, airfreight is the go. To the East coast, we can use all of the above, but also use rail and truck across the Nullarbor.

After a golden run of globalisation - where the world became increasingly smaller through each generation of transport improvement - geopolitical tensions, climate change and outright conflict have made getting product to market more complicated.

Let's have a gander at some of the pinch points that are squeezing global supply chains currently:

Panama Canal

The Panama Canal allows products from the west and east coasts of the Americas to take a shortcut when heading in the opposite direction. It is so critical to global trade that the Panama Canal is the reason why the most common size of bulk ship is called a Panamax – that is, it’s the ‘max’ size that fits the canal.

Given the large agricultural regions of Brazil and USA exit from the eastern side of their respective continents, if the customer is China (and for soybean, corn and beef, it often is) - hoofing West through the Panama Canal is the fastest route as opposed to heading Far-Far-Far-East.

The Panama Canal primarily consists of a natural lake and river system fitted with locks to control the water flow every time a ship is raised or lowered. With persistent drought conditions over 2023, there was insufficient water to keep the canal flowing at full pace. From 14,000 vessels in a normal year, vessel transits dropped to just below 10,000 in FY 2024. As for the rest? Wait your turn or it’s the long way round! Flows are returning to normal since the drought broke but concern exists that declining rainfall trends due to climate change will cause repeats.

Suez Canal

Connecting Europe to the Middle East and Asia is the Suez Canal. Approx 20,000 vessels take the link between the Mediterranean and Red Sea annually.

As part of overall tensions rising in the Middle East, the Houthi militia group in Yemen has been disrupting sea trade by attacking marine vessels in the Red Sea since late 2023. For many Western ship owners, that has meant adopting an avoidance policy, resulting in a two week extension travelling around the bottom of Africa. (Noting that certain allied regimes are allowed to pass).

Although there has been heavy military response from actors like the US, the small and cheap rockets and drones used by the Houthis have meant the risk is difficult to nullify and is still a concern. The OECD estimates that the increased freight cost, if persistent, would add 0.4 percentage points to consumer price inflation in OECD countries.  

Black Sea

The Black Sea is the largest single trade route for the global grain trade. Ukraine and Russia export around 55mt each depending on season (and how much of Ukraine is occupied by Russia). The agreement allowing free passage for grain vessels from Ukraine was ended by Russia in July 2023 meaning Ukrainian grain vessels had to run the gauntlet down the Romanian coast.

Mostly, this strategy has worked, but recent strikes on four grain vessels means that only older, inefficient vessels are risked, and insurance premiums for the cargo are significant. This adds cost to the journey.

Flight Paths

Air freight is typically less impeded, but flight lines are regularly rerouted to avoid danger. This could be natural, such as volcanic plumes but, with the downing of Malaysian flight MH17 in 2014, the entirety of Ukraine became a no fly zone for commercial traffic (see image below).

In addition, sanctions imposed due to the full scale war in 2022 have seen Western carriers avoid the whole of Russia, which has resulted in lower efficiency for some routes.

Similar avoidance occurs periodically over conflict zones in the Middle East, as recently occurred with Israel.

Upshot

The consequence of delays, longer freight routes and increased risk is cost. Although negative to global trade as a whole, there can be benefits to Western Australia. Given our location directly to the south of the world’s most populous region, there are few choke points and no current conflicts that inhibit major trade pathways.

As a result, the risk discount that is factored in by an Indonesian flour mill booking a vessel of Ukrainian wheat does not apply to the equivalent cargo from Geraldton. Adding in that the Ukrainian vessel’s journey, that used to take 30 odd days, is extended a further two weeks compared to the 10 days in total from Geraldton, WA wheat looks even more attractive (freight is chartered by time after all).

However, the same principle means that far flung markets are less easily served, which concentrates trade on closer countries, resulting in a lack of diversification.

The world is getting big again.  

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