Drought conditions in the Midwest have lowered water levels on the Mississippi River to their worst depth since the late 1980s. Lower water levels make the movement of barges down the river costlier and slower. And this is creating a supply chain headache for farmers and other industries that rely on the waterway to export goods. To understand the severity of the problem, we spoke with three guests. First up was Ben Scholl, President of Osterbur & Associates, which specializes in the sale and export of specialty grains. Then we spoke to Mercury Group CEO Anton Posner and President Margo Brock about the broader importance of the Mississippi River and our inland waterways ecosystem. This transcript has been lightly edited for clarity.
Key insights from the pod:
The drought in historical context — 4:38
How low waters slow down grain transport — 9:47
Alternative transport methods for farmers — 12:13
What the Mississippi river needs now — 15:00
The importance of inland waterways — 21:24
The industries dependent on the river system — 31:34
The role of contracts in the barge industry — 38:00
The significance of climate change — 40:02
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Joe Weisenthal: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:17)
Tracy, you know we've covered so many different aspects of supply chains and logistics over the last couple years. I think our first supply chain episode was late 2020 when we first started noticing that the cost of shipping goods from China to the US seemed a little high.
Tracy: (00:36)
Yeah, you're right. So the early days of the pandemic, there was all this shipping-related chaos. And I guess luckily or unluckily, I don't know, I had a sort of front row seat to observe some of it in Asia because it became very, very apparent that it was becoming not only more difficult, but also more expensive to ship goods from China to the US.
Joe: (00:58)
So it was like, ‘Huh, what is going on with that?’ And then we looked at international shipping and we started pulling on that string, and that got us to ports and that got us to trucks and that got us to everything else.
Tracy: (01:08)
We pulled the thread, and you always think there's gonna be nothing left, and then like you find something around the corner, right?
Joe: (01:14)
There's one big area that we've talked about doing for a long time that we haven't talked about.
Tracy: (01:18)
Oh, yes. Yeah. Well this is my point. There's always something new ... uh, barges.
Joe: (01:23)
Right. So the inland waterways, the Mississippi River in particular, has always been something we wanted to talk about. It's significant in the US economy, this inland infrastructure. But we just haven't gotten around to it. However, now we actually have a very good reason to talk about
Tracy: (01:43)
It's the barge episode!
Joe: (01:44)
The barge episode is finally here.
Tracy: (01:46)
But we do have the perfect peg, which is that at the moment there is a massive drought in the Midwest and it is affecting water levels on the Mississippi, which is of course the most important inland waterway in the country. And I think, you know, I was reading a Bloomberg article, it said waters in Memphis fell to negative 10.79 feet recently, which is slightly lower than the previous low of 10.70 from 1980.
Joe: (02:16)
Did you say negative? There was negative water?
Tracy: (02:19)
I'm not entirely sure how that works.
Joe: (02:22)
But it sounds bad.
Tracy: (02:23)
It's bad.
Joe: (02:24)
Right. So there has been a very severe drought in the Midwest and it seems like a double whammy, right? Because on the one hand, if you depend on the Mississippi River or any of the inland waterways and the river's tributaries to move your grains or to move your goods, that's a problem. But also it's just bad because it's bad for growing.
Tracy: (02:44)
Yeah, exactly. So if you're a farmer, you probably struggled to actually grow your harvest this year, and now you're struggling to get it out to the market where you're actually selling it into. So yeah, a double whammy. And also, you know, we're going to be speaking a lot about grains on this episode, but there are all types of goods and resources and commodities that actually move up and down these pathways on the water,
Joe: (03:09)
Right. So we're going to do this episode a little bit differently. We're going to break it up into two different sections. But first, let's start with someone who works in the grain business and talk about how it's affecting them. We have the perfect guest to talk about grains and the effects of the drought on the grain industry and on shipping grains. We are going to be speaking with Ben Scholl. He is the president of Osterbur and Associates, which works with specialty grain companies, organic grains, non-GMO grains, etc., to move their goods overseas or to sell their goods. Much of it to destinations overseas. And of course his clients are highly dependent on the functioning of the Mississippi River and the barges there on. So Ben, thank you so much for joining us. Why don't you just tell us what you do in the grain ecosystem?
Ben Scholl: (04:01)
I am the president of a specialty grain company called Osterbur & Associates. We buy specialty grains, non GMOs and the like and export them to Japan throughout the river system in the United States. Also I come from a family farm. So I have a little bit of a farm background and we are involved in production of agriculture in central Illinois in the production of specialty grains.
Tracy: (04:24)
So as a jumping off point, you know, we talked a little bit about this in the intro how bad things actually are on the Mississippi at the moment, but give us your sense of how things are at the moment and how they stack up against history?
Ben: (04:38)
Well, this is certainly, I've been doing this for about 16 years, certainly the worst I've ever seen. As I talked to some of the other veterans and people with a little more experience shipping on the river, it seems to be about as bad as we've had since the 1980s. A lot of people are citing 1988, matching some of those records. 2012 was a dry year. We had some low water we had to contend with, but this is a lot. Really new compared to what we've been dealing with in the recent history, which is high water.
Joe: (05:09)
That's interesting. So it's a double whammy. So if you are producing grains in the Midwest, you're contending with, I imagine, drought is extremely bad just for the growing of grains and then the actual logistics.
Ben: (05:23)
Yeah, so we're kind of beholden to the weather all year round, especially if your main market is the export market, which for most would be on the river and river tributary terminals. We are usually pretty consistent on the river with river levels. But you know, we usually have to deal with low water in the fall, high water in the spring. And it's just something that we usually have to keep an eye on. Very rarely does it get parabolic in a situation like we're in today.
Tracy: (05:50)
Can you talk to us a little bit about the life cycle of a harvest, or I guess the supply chain of, you know, a particular grain is grown in a field on a farm and then it goes down the river and it ends up in an export market like Japan or elsewhere? How does that process normally work and where are the sticking points now?
Ben: (06:13)
Typically farmers will want to get in the field and plant their crops in April, May — those are the ideal times to get in. You would typically begin harvest in that scenario in September, which would last through October and into the beginning of November. Now, for export, soybeans are usually the first thing to leave the United States in a typical harvest, which is where we're at right now.
Soybeans, about 80% of exports will happen between September and February. A half to 60% might move by barge. That's where we are today. Corn usually follows maybe at the turn of the calendar year, that's when our big export program for corn will happen. So right now it's pretty much all hands on deck in terms of the shipping to get the soybeans out. Our big buyers, obviously China, we want to get those out and overseas as fast as possible because we will have a South American crop come online somewhere January and February, where we will no longer be as competitive to the market.
When you ship something, depending on where you ship from, I will use St. Louis because it is the biggest origin port out of the Center Gulf — that might take, in a normal scenario, 10 days to get to New Orleans, maybe another 30 to get to a place like Japan after it's loaded on a boat. Right now what we're seeing is at least double the amount of time to get from a St. Louis to New Orleans. But that varies day by day. There are landmines and pitfalls all over the place on the river right now. It's legitimately a day-to-day situation.
Tracy: (07:49)
So is the issue for farmers that the longer it takes to get the crops out and exported to market, the less competitive they are? Or is the issue that if you wait too long, the crops themselves start to spoil? Or both?
Ben: (08:03)
So this is where it's interesting. While the dry weather is actually a hindrance to shipping and moving the crop on the river, it is hugely beneficial for the farmer getting their crops out of the field. We are making very good pace on harvest because there's been no rain to stop the harvest progress. So they're coming off an extremely, extremely fast pace in the west, even faster because they don't have as much of a crop because of the dryness in some of the drought issues out there.
Where the bottleneck occurs is at the shipping point. Most farmers have built ample storage over the last few years, plenty of storage to store on farm, but the bottleneck becomes at the origin port. So now we cannot move as many barges because of reduced tows and barges getting stuck all along the river segment. And that creates a backup at origin. Where it hurts the producer is a basis level, or the difference in cash prices versus the Chicago Board of Trade, continue to drop off. So whereas a farmer might see something relatively equal to what you see quoted on the board, they might be getting a dollar less because the transportation costs and risks are so high.
Joe: (09:34)
Can you talk a little bit more about the logistical landmines right now? What actually happens in low water and how does it slow down the shipment of these goods or the grains?
Ben: (09:47)
So low water causes two problems: channel depth and channel width, of which you can take barges down. How this is being slowed down on the river currently, you have a tugboat that will push a pack of barges from St. Louis to a New Orleans, and they might typically push 40 barges. Well, right now the max is 25 on the river. The amount of grain that we can actually put in a barge is being reduced. So right now everybody is a nine foot draft. We can only sink a barge nine foot down and ship it. That constitutes somewhere between 25% and 30%, less than normal.
Some of the other issues — longer turns where a lot of people are running daylight-only hours right now and primarily the reason for that is so they can dredge or dig out the bottom of the river at night. So it just continues to make longer turns down to the Gulf and back. We have stoppages, which are day to day. It could be five, six blockages on any given river segment. All of that really, you put all that together and what that means for shippers and grain dealers and people that move product on rivers is higher shipping costs.
Tracy: (11:01)
So what are farmers actually doing to offset some of these issues? I mean, I guess if you were prepping ahead of time for climate change and major drought, maybe you would build up your storage capacity, for instance, so that you could store a lot of your grains if you can't move them? Are there things that farmers can do to offset some of these challenges?
Ben: (11:24)
Well, farmers, you can always price ahead. You can price before the issue gets here. This issue really started well early in the year, but it really came to a head in September and October. So there are ways to mitigate that risk by pricing ahead, taking some of that risk off your table. You also have a huge buildup in storage on farm. So a lot of these producers can tuck away the grain until there's a more beneficial river system, a better chance and a better opportunity to sell better values once we get some of these issues sorted out.
Joe: (12:02)
Do farmers have any alternative ways of shipping goods? Is there any rail or trucking nearby or do any of them have that option when they can't get a spot on a barge?
Ben: (12:13)
Absolutely. Farmers by and large have their own trucks. They can move their own product. There are rail houses. But rail, even before these river issues, was pretty taxed. And they've had their own issues and performance and otherwise in certain markets, in certain parts of the US. So I don't know that rail is in a position to really help out the river market.
And we already have a huge demand pull by rail to move corn and beans and other products to the west where we had a substantial drought and to the southeast where there's good demand for rail-in product. And it really isn't economically feasible to truck your grain to the New Orleans, which at the end of the day for export is where all this product needs to be. It's really a sit and wait, look for other markets like a railhouse, look for other markets like ethanol and feeders, and just if you need to move grain, find something else other than the river at this point to find a home because the values will be much better to the producer.
Tracy: (13:18)
So this is one thing I was wondering actually. You know, we're talking about moving things like soybeans down the river so that they can get exported to markets like China and elsewhere. How much of the grains that are moving through the Mississippi, how much of that goes to the US versus the rest of the world?
Ben: (13:38)
So if you're talking about, let's just take corn for instance, because I deal in corn mostly, but probably it's corn…
Tracy: (13:47)
It's corn! (Sorry, I can't resist)
Ben: (13:47)
Oh my gosh. That's all I hear in my house. I mean my kids have never cared one iota about what I do, but since that came out, they've done so much for the corn industry. Let me tell you.
I would say 13%, 15% of like the corn in the United States goes for export. The majority of that gets used in-house for between ethanol, feed of animals and just other domestic food products. Beans are much more heavy export, probably closer to half or something like that. So that's why there's such a big onus. Not only is it our time to ship beans and to get them out, it's our window, the place where we're the most competitive, where we are typically cheaper than Brazil and our competition in Argentina.
That's why it's such a high priority to get those out now because they will be coming online with bigger crops as especially Brazil continues to increase acreage year over year. They are becoming more of a force and a bigger player in the grain and especially soybean competition force in the world.
Joe: (14:48)
Do farmers have to make a decision about whether this might be like a new normal? Because droughts can last a long time. Obviously the drought in the southwest has happened for several years and there are crises of water levels there. Do farmers have to make a bet, so to speak, on whether the drought is going to persist and constrain waterways, and there’s a new normal and there has to be a different way of exporting their goods?
Ben: (15:13)
I don't know that they need to sit there and worry about drought into the future. And as it relates to the river system, they could certainly look at diversifying some of their end use buyers, maybe do a little ethanol, do some river feeder, maybe diversify it. But my experience in weather and river conditions and rain is much like the economy, just like a drought, in a recession, the best part about 'em is they will end at some point.
Tracy: (15:45)
What would be most helpful for farmers at the moment? Would it be like more coordination on the river or better dredging capacity? What would people like to see here?
Ben: (15:56)
There's no magic bullet right now for the river. The thing that we need is heavy rain, a flash flood type event north of St. Louis. The biggest problem with this event that we have right now isn't so much the low water. It's where the low water is located. The biggest problems are Memphis South. So if you had flooding on the Illinois, some of the bigger companies an ADM or a Cargill could shift their operations to really push product out of the lower Mississippi or the Ohio River and kind of arb that opportunity. Problem we have right now is where this biggest issue is located, and that's Memphis South, which affects every single river segment. So there is no magic bullet.
What we need are heavy rains, a flash flood type event, like I said, that would just run off into the rivers, the tributaries in the main rivers to provide us a little relief. The other would be a kind of just soaking rain and start knocking back this drought to where we have soil moisture and every rain adds to it. That is obviously a longer process. It'll be slower to bring the river levels back up, but absent a widespread rain, dredging is just a kind of a bandaid on a bullet hole at this point. It's just keeping us going.
Joe: (17:16)
Just one last question for me out of more out of curiosity, but you mentioned that normally the problem that you face is actually too high water. Can you talk about some of the challenges that that poses?
Ben: (17:29)
Yeah, so high water, the one experience that I had that was probably the worst would've been the spring of ‘19, where it just continually rained and more than rained. It didn't ever get warm in the spring and there wasn't a whole lot of sun to dry up the soils. And we were pretty much nonoperational on the river, especially the Illinois River, until from spring to June where there was a complete backlog at origin. A lot like what we have here, but just nothing was moving.
We're actually trying to move in this situation with high water there, you can get to a point where you can't load anything physically because the water is so high that barges sit above spouts and product that you're trying to load on the barge. Neither are fun, but high water comes with its own set of challenges, just like low water and high water has definitely been the more prominent of the two in in recent years.
Joe: (18:31)
Ben, thank you so much for joining us. This was extremely helpful, so appreciate you coming on Odd Lots.
Ben: (18:37)
It's an honor. Appreciate you guys having me.
Tracy: (18:40)
Thanks Ben. That was really good. Well, Joe, that was fascinating and there is a lot to dissect there, but just before we do, we're going to bring in two other guests, two people who have a ctually been on the show before kind of talking about barges, but this time we're really going to get into it. We are continuing our discussion of the Great Mississippi drought and what it actually means for the economy for transport and logistics. We are going to be speaking with Mercury Group CEO Anton Posner and President Margot Brock. Anton and Margo, thanks so much for coming back on.
Anton Posner: (19:42)
Yeah, great to be back.
Tracy: (19:44)
So I remember the last time we spoke, we did touch on barges briefly, and so Joe and I when we were prepping for this episode, we thought, who do we need to call to talk about barges? And it was of course Mercury Group. Just to begin with, give us a sense of your connection to the barge business?
Anton: (20:04)
The river business is a huge part of the Mercury Group business and has been since our inception. Of course millions of tons move, of commodities and cargoes move on the river system every year — northbound, southbound, east and west throughout the Mississippi River, Ohio River system.
So it's been a big part of our business, primarily moving import commodities coming in via New Orleans and Mobile, commodities like steel and aluminum and lead and zinc and raw materials for the steel and metals industry. It’s such a significant part of the North American and American transportation and a big part of Mercury Group's business that we manage for our clients.
Joe: (20:57)
Can you talk about, you know, we've talked a lot about logistics and shipping and ports and trucks and dredging on the show several times, but just how significant is this infrastructure? I do feel as though inland waterways specifically do not get that much attention, I guess maybe outside of when they're in crisis, but how significant are they?
Margo Brock: (21:24)
That's a great question because I think it is such an unknown in this country, people don't understand how extensive the river system is and how much of the US gets fed in and out of materials on the river system. Anton and I are East Coast-based people, so I didn't grow up on the Mississippi. I didn't see barges moving on the Mississippi and I didn't know they existed growing up. And even Anton and I who went to Merchant Marine School, we came out as licensed Third Mates. Even in college we didn't talk about it. We talked about ocean freight and bigger scale. The river system is tremendous and the amount of commerce that runs inbound — it really runs the gamut. There's barges that move liquids. There's incredible fleets of barges that move dry materials inland.
At one point we're moving organic soybeans into middle America because although we make soybeans here in the US we don't have a great organic crop and you have to feed your organic meat organic food. So to have organic cows, we need organic feed stock for them. We send raw materials into production facilities.
So when we're looking at what has happened in this market that we're all living of reduced availability of so many items that we think of that come from China in containers, you know, in the chips for our cars and Christmas gifts on our shelves, that's one part of the market, but there's a lot of raw materials that feed up into the US that aren't able to reach these production facilities if the river is not working. And that's the next great shortage that happens when we can't get materials up to the production facilities.
And then on the export side, we'll have discussed grain already for this podcast. Export grain is a huge part of the US grain market. So although we feed plenty of ourselves domestically with what we produce, it's a really big global market for US grain. And right now is the grain season.
So when rivers are not running well, which is what we're going to talk about today, and you cannot get that grain out of the river system, that's a huge financial impact on our farmers. So it really is very extensive, the reaches, because the river system, you know, it all runs up off the Mississippi and feeds east and west. It's a very big footprint of the US that the river system touches.
Tracy: (24:21)
So talk to us a little bit about what you've seen so far. How would you describe the current situation on the Mississippi?
Margo: (24:29)
The current situation? Middle America is suffering from a huge drought and typically about this time of year, it's a combination of we have southbound grain coming out, which dominates the landscape because it's so important to the US economy to be shipping that grain out. And usually they're fighting against weather systems or hurricanes. And we're used to seeing, you know, this time last year they were recovering from [Hurricane] Ida, which took out grain elevators and then there's too much water in the river and it's running too fast and it's dangerous and there's so many impacts from too much water. And what we're seeing this year is we didn't see any big weather systems come into the Gulf. The hurricane came came into the Gulf, it went to Florida, it didn't go to the river system. The rivers did not see any of that rain water.
The river is at historic lows. And there are moments where, you know, the gauge at Memphis, Tennessee reading water levels, they've been recording that gauge for the last 89 years. And we learned through current events that 1988 was the lowest mark in that 89-year reading on the river. Well, we've surpassed that. We have set new lows on this river. It is significant on the lower Mississippi. And what it has caused is a series of domino effects.
Really, the water is low. We are getting channels evaporating where we just can't transit because they're too low. And certain areas of the lower Mississippi have been dredged already. There are other areas waiting for the dredge. The dredges are very busy right now up and down the river trying to keep, keeping traffic flowing. We're seeing when those rivers open traffic is in one direction. So you've been waiting for days for the river to reopen, your barges are stuck and now you sit a few days more while traffic from the opposite direction passes through.
And that dredge is now on its way somewhere else to salvage another location that's having problems. It's almost doing bare minimum just to keep the river operating and keep barges flowing. We are also, because the water is so low, it restricts how much you can put in a barge. And so we're seeing very low drafts on barges, which then has that next implication that you need more than the usual amount of barges to move that size parcel of cargo. So, you know, if you were previously, you would've moved your parcel in 10 barges, maybe now you need 14 because of how you have to load them. So it's really, there's constraints on the system coming from every direction. You know, we can't get the barges moving fast enough to get them to a point where we need them to load. Plus we need that many more to load now.
Anton: (27:37)
Yeah. Add on, you know, that need for more barges per ton effectively on top of a busy grain season. And I think the person you spoke to on the grain market probably give more insight on this, but we've seen a more active export grain market this year which seems to be of course a result of what's happening with Russia and Ukraine and European markets buying more American grain.
We're not grain people, so we'll leave it to the grain experts to comment on that. But yeah, this situation on the on the river system has come at a time where when there's a ready constraint on the barge market, and we're seeing, as a result, we're seeing spot barge rates skyrocket.
We've seen on an important lane that we're moving on raw materials heading northbound, we've seen spot rates for October in the range of nine to 10 times what the annual 2022 contract rate was for that particular move. And we were lucky to be able to find that.
Joe: (28:45)
Tracy, I just found we have USDA US River Barge Grain spot rates on the Terminal.
Tracy: (28:51)
Oh, so we do. For St Louis Missouri.
Joe (29:00)
So in fact, it's very clear what Anton just said. So, you know, going back to August, we were at $15, I'm not exactly sure what the — oh, $15 per short ton — So we were at $15, and it got as high as $106 in early October. So really an extraordinary rise in spot barge prices.
Tracy: (29:14)
Wow. All this chaos on the Mississippi. And you know, a lot of this is sort of reminiscent of the shipping chaos that we were talking about in 2020 and 2021, but what exactly can be done to alleviate this, if anything? I know there's some dredging activity going on. Can you try to expand capacity on the river rush, to expand capacity at river ports? Is any of this possible, does that help right now?
Margo: (29:41)
The fix right now is a good old rainstorm. They just need water. You know, there is no significant rainfall in the forecast. Everyone's watching carefully in the barge lines. And then the next concern is when that rainfall comes, the surrounding area is so dry as well that it's going to take a bit before we get to a point where there's actually runoff feeding the rivers. That's the corrective action that we need. We just need water in the rivers. You know dredging is always a difficult thing to stay ahead of, to keep channels open. And you're talking about a massive amount of navigable rivers that the Army Corps of Engineers needs to maintain to keep us moving freight on the rivers of the US. So increasing capacity right now is purely just by keeping channels operating, keeping navigable waterways operating, and that's where we're suffering.
We just don't have the water to be able to navigate up and down these rivers right now. At some points, we look at barge capacity being the issue, and it's usually this time of year that's a big issue because the barges are all tied up in the grain sector and those that are looking to move northbound cargo are constrained because the barge lines feed all their equipment up river. But that's not even the issue anymore. The issue is it purely can't move. There's no water, it can't move, and everyone is just desperate to get the empty barges back and get them repositioned to the next point for a load and keep freight moving.
Joe: (31:20)
I have a short question and then a slightly longer question. So the first short question is just what are the dominant non-grain goods that get shipped along the river?
Anton: (31:31)
Coal, steel, metals, chemicals and tank barges petroleum products, things like that. Iron ore, raw materials, ferrous alloys, things like this that go into steel making, but coal is a huge commodity that moves on the river system. Our business tends to fall mostly towards the metals and steel markets and the raw materials that go around those. And they're keeping us pretty busy, Joe.
Joe: (31:59)
So then this gets to my second question, which is, okay, yes, I'm looking at this chart right now, the spot rate shot up. But if there's an issue of you just can't move it, which is sort of like a lot of our themes, there are certain things that you can't buy at any price when there's a constraint on how many barges there are or the depth of the river. What are your clients doing as alternatives or how are you helping your client find alternate means of shipment?
Margo: (32:26)
That's a difficult one to work around, but it does depend on the commodity. When we're looking at a lot of the bulk products, which are raw, you know, in terms of being raw materials into production, there's often not necessarily the easy ability to offload it at a terminal and find another conveyance to move it.
When you're talking about a ship that has 50,000 tons of material on it or even 30,000 tons of material on it, that's a huge, huge, huge amount of trucks — if you could move it in trucks. To wait for rail cars would be not feasible. You know, in a lot of the instances, waiting out the delays on the river system is still going to be likely the best use of your time, the most time-efficient to get to the end destination because simply finding a place to offload that much tonnage to ground and reload it out and finding enough conveyance to get it to that next point is too hard.
Now, once you move into break bulk materials where, you know, steels and metals, you know, that fall into our sector right now, we're seeing a good portion of that landing to dock when it wouldn't have before. And it's simply because there is no spot market for barges. If you didn't have it booked and you don't have a contract for it, nobody's moving it, nobody's touching it.
Anton: (33:53)
And we're talking about like ships coming into New Orleans, discharging to the city docks in New Orleans, just to leave it outside for later reload to barges instead of going direct from ship into barge, which is the cheapest, most cost effective.
Margo: (34:11)
Right. And we are finding too that we're running a lot of rail rates on lanes that were not expected to be rail because there is capacity to offload break bulk materials onto the dock. Stevedores, when it just needs a basic outside storage, it's easier to navigate that and figure that one out. So it's landing to outside storage and then we will bring in rail cars and move it out that way is the best option for some.
Other cargo may end up seeing what happens with the river system if it's not urgently needed up river or at a consumption point, it may just stay on the dock in New Orleans. We're also seeing some interest in alternate ports like let’s go to Mobile, where maybe we can barge north out of Mobile and avoid the lower Mississippi River just to not get caught up in those bottlenecks.
Tracy: (35:10)
Margo, you briefly touched on this at the beginning. Can you maybe describe, what would you expect the second order effects of all of this to be? Is it going to be higher spot rates and will that feed into prices? Is it going to be shortages because manufacturers can't get the core components or resources that they need, things like steel or coal to stoke various furnaces? What exactly is going to be the result of all of this?
Margo: (35:39)
Well, right now it seems like everything is moving slowly, but things are recovering. And the biggest fear that you have in pushing things up river predominantly, you know, in talking about a US economy and a US workforce, we become concerned with feed stock, raw materials, making it into production facilities to keep them running, right? We don't want to see anyone shut down. We don't want to see a labor force furloughed or cut because a facility has to stop working. So that's definitely an ancillary effect and an outcome that you have to worry about.
But the river, thankfully, you know, they're working hard to keep it moving in a modified capacity right now. And what we're seeing from the barge lines is that they are currently able to cover what their commitments are. They just can't go above their already booked commitments. So if we can keep it moving and keep the river alive until rainfall comes, that will help a lot and help lessen much of the impact I guess.
But there's still going to be impact. And I think what we're anticipating is barge contracts run most commonly, if you're on a contract, it’s following a calendar. So we're coming into that time where we should be negotiating for 2023 contracts, but nobody's talking about it yet. The spot market being eight, nine, 10 times what the contract market is not a good time to be talking about, ‘Hey, what do you think you wanna price me for 2023?’ It's a really loaded question to be asking right now and nobody's having the conversation. Everyone is agreeing to defer that topic right now.
Joe: (37:33)
Can I just ask a quick question about that? You know, when we've done episodes on trucking, a contract in trucking seems to be sort of a nebulous thing, and entities are ripping up their contracts all the time and they're not particularly legally binding, particularly if spot and contract deviate far. When you talk about contract with barge operators, are these more binding or are they also sort of like loose and subject to repricing?
Anton: (38:00)
So Joe, the barge lines are honorable, these are binding contracts, they are performing. These annual contracts that as Margo mentioned, right, it's typically a calendar year for these types of contracts that handle the metals and steels and some of the raw materials that we manage. So the barge lines, they stand behind the contracts, they stand behind the pricing on the annual base, annual rates that they agree to.
And as Margo mentioned, what they're not doing is going over and above. In a good year for shippers, there's some extra capacity and there's a possibility to get a barge or two extra under the contract rates when needed. Now as Margo mentioned right there, the barge lines are not giving a single barge beyond what they're committed to in their contracts.
But they are performing and there's no back trading, a phrase that we like to use, right? No back trading. And, Joe as you mentioned right, with the truckers, it's a whole different world of what a contract means. But in the barge world, a contract is a contract and the barge lanes are sticking to that.
Joe: (39:16)
I just have one more question and, you know, weather is what it is. And the rains, there will be another rain or maybe a flood and that might help. But how much long-term thinking are your clients doing about climate change and whether the river capacity may be impaired on a meaningful basis for some time to come?
Margo: (39:36)
Probably not as much as they should be thinking about it, because I know a lot of people are going to say there's no such thing as climate change, but I don't know, I sort of have to beg to differ on that...
Joe: (39:47)
So, setting aside the degree to which we can attribute this current drought to climate change or not versus random things that happen in the weather, your perspective from your whole career is that things have been worse lately?
Margo: (40:02)
Yes. But I do think that is supported by weather data. I think that is supported by when you look year on year, the storms that hit and, you know, talk to the people that live in New Orleans and tell me what they think about increase of hurricanes, right? I mean except this year, this year they're not getting them. And you know, dare we say we need a good hurricane to roll through there. We don't, but the river needs it. But yeah that was something I had actually read at one point talking about the climate change and talking about how much of the US is under a drought condition right now.
And this time last year, they were speaking specifically to the river system and the barge market. Our barge market was desperately trying to recover from a huge hurricane that came through that reeked complete havoc with the system. And here we are a year later, we're talking about we have no rain and we have havoc in the river system. So I think, I think it's really something they do have to talk about. And there was one article I had read and it talked about even just global trade and the key chokepoints that are exposed both on political situations and piracy and, you know, acts of man that are in the control of someone, and then the weather events that are in control of no one.
You know, and talking about straits and Panama Canal and Suez Canal and places like that and the Black Sea, and everyone being subject to the impacts of weather. I mean, any weather extremity causes a problem in shipping. And actually this article I read, it was so interesting that it went as far as to point out excessive heat warping, about 10 years ago, it getting so hot in parts of the US, it affected the railroad tracks because all the railroad tracks expanded and it caused tremendous derailments. So, you know, it's not just water, it's not just our barges and our ships. It definitely affects our our network across all conveyances.
Tracy: (42:25)
Yeah, I think that's a really important point and one that we all seem to be learning in real time, unfortunately. But Anton and Margot, that was fantastic. Thank you so much. Really appreciate you coming back on Odd Lots to talk about barges just like we promised we would do.
Joe: (42:42)
Finally, the long-awaited Barge episode. Thank you so much.
Tracy: (43:01)
So Joe, I'm so happy we finally did the barge episode. I should say I've been reading a really good book on barges lately that a listener actually recommended. I's called “Brown Water Boating” by Dean Gabbart. Anyway, if you want to learn more about barges, you should definitely check that out.
But you know what was interesting in that very last bit of the conversation with Margot and Anton, the talk about climate change. I mean, this is a climate change episode, right? And this is sort of what, I mentioned this already, but this is what we're all learning now, is that a lot of our economy depends on the weather acting in a certain way. There being enough water for us to transport goods by river, there being not too much heat so that the railway lines still work. And we're kind of discovering all these vulnerabilities in our transport and infrastructure as climate change worsens.
Joe: (43:56)
You know, I'm thinking also back to that episode we did earlier in the year with Alex Turnbull and we were just talking about energy and the issue of nuclear plants that need a certain amount of cool water to cool down and if the rivers are too warm then that doesn't work. And so yeah, we really see that like certain things we take for granted, like the smooth operation of the Mississippi River or just the idea that there's going to be cool water nuclear facilities, is not something that we can just take for granted.
But it is interesting and, you know, it really does seem like the inland waterways, the Mississippi River, it kind of feels like old timey right? Like if you could, like what does the Mississippi River conjure up? Like some sort of like old river boats, right? You know of those authors who like wrote books about that time. You don't think of it as being like all that vital like these days, but obviously it really is. Mark Twain, was that the one?
Tracy: (44:54)
I was gonna say Mark Twain, like come on, Mark Twain, riverboats, Mississippi you know, rafts going down the Mississippi. Okay. But seriously, if you like that topic, you should read that barge book. The other thing that struck me is, it's not even like we need more water, it's that we need water in a specific pattern. So as Ben was mentioning, you know, you either need a downpour sort of up river that then flows downstream. Or you need a prolonged rain that softens the ground like further south and then flows into the river.
And then the other thing that struck me was that even if you get a disruption like this and it's relatively short-lived, to Anton and Margo's point about the contracts — the way those work basically means that this disruption can have this lagged effect for many months to come, even if it’s only extreme for two or three months.
Joe: (45:51)
The chart is really extreme. It's come down a little bit, those spot prices. And as they pointed out, nobody wants to enter contract renegotiation season now with the levels here because where do you price things? I also liked what Anton said about how the barge business, they take their contracts seriously. Unlike those truckers where they just rip them up. In the barge business, a contract is a contract.
Tracy: (46:18)
Words to live by.
Joe: (46:19)
Yeah. Live like a barge operator. Just to Ben's point about how, look, you know, price is one thing and capacity is another thing and if you don't have the capacity, then you have all these issues. You have various terminals that aren't equipped to move things at different spots. You have more storage at the ports because you're just waiting longer for the barge to come and move them. It's a real mess. And again, it’s interesting in the broad sweep of things that we cover, because there are clearly things that are sort of macro, right? Like inflation generally probably is a macro story, but this really does seem like one where it's a lot of bad luck.
Tracy: (46:58)
Yeah. On top of the Ukrainian grain situation, as well, which we've already spoken about.
Joe: (47:04)
And the booming demand for US domestic grains. So it is connected, to Margo and Anton's point, the booming demand for grains globally also means that there's less capacity for non-grain goods like the various industrial commodities or coal or iron that they were talking about. So it really is kind of a perfect storm.
Tracy: (47:23)
I knew you were gonna say it...
Joe: (47:24)
It does seem like a perfect storm.
Tracy: (47:27)
All right, well on that note, before we utter any more cliches , I think we should leave it there.
Joe: (47:32)
Let's leave it there.
You can follow Ben Scholl on Twitter at @ottoscholl and Anton Posner at @antonposner.