The current sovereign debt and financial crisis gripping the European continent has so disrupted the dynamics of international shipping that it is leading the world's largest freight operator to take drastic action, in a move that is likely to help inflate the cost of groceries worldwide.
Coppenhagen-based A.P. Møller-Mærsk A/S announced Tuesday that, as a result of a recent drop in market shipping rates and ever-higher costs for fuel squeezing its bottom line, it would be lowering capacity and hiking rates in its core business of hauling 40-foot modular boxes around the world. The company noted it had been particularly hurt by the collapse in shipping rates for moving cargo between China and Europe, a route affected by the crash in demand from the Continent, which it said had dropped by more than 30 percent since the beginning of August.
"It is loss-generating to sail Asia-Europe at the moment, and therefore it is crucial for those in the market that the rates are raised," Nils Andersen, the company's chief executive, told The Wall Street Journal.
Unfortunately for consumers, the plans to raise those rates will likely be borne by them in the end. One way large shippers can raise their margins is by "slow-steaming," slowing down the speed at which freighters travel to save on fuel. But in the case of ships carrying refrigerated cargo like produce and meat, slowing down is not an option. Instead, Mærsk will seek to raise prices on transporting trailers to some $1,500 per box, a 28 percent rise on current prices around $1,175.
Thomas Eskesen, global head of refrigerated business at Mærsk, told an industry magazine the net effect will be that "growers worldwide will face increases so individual growers/exporters can go with confidence to supermarkets and ask for more."
Being the industry leader, Mærsk hopes its moves will be followed by competitors, as occurred earlier this year when it raised prices.
And market participants agree that is exactly what is likely to happen.
“I don’t think Maersk will be the last. In fact, I think we will now hear all the lines saying that they will also apply rate increases. If the brave don’t lead, the meek won’t follow,” Andy Connell, business manager of South African logistics for food giant Dole, told British shipping newspaper The Loadstar.
The end result: sticker shock at the checkout line.
Unfortunately for consumers, the shipping industry dynamic is only one of the factors likely to make food pricey in coming months and years. Extensive droughts in North America and the Balkans have badly hit the world's grain and cattle stocks, a situation food economists expect will lead to record food prices over a "multi-year" period, according to Bloomberg. Earlier this month the British National Pig Association released a series of press statements warning of impending bacon shortages worldwide, something cheeky web pundits quickly christened "The Aporkalypse."
On a more serious note, while high food prices would be tough on the wallets of consumers in developed countries, they could be life-threatening to those in developing economies. The U.N.'s Food and Agriculture Organization, for example, estimates that a spike from current price levels could spark violent food riots in poor countries around the world. Food scarcity violence was widespread in mid-2008 and is believed to be one reason behind the "Arab Spring" period of civil turmoil.