Overwhelming support received last week in the U.S. House of Representatives for badly needed shipping-policy reforms is a crucial step, but far from the only one needed, to ensure reliable exports of U.S. dairy products to growing overseas markets, said Tony Rice, trade policy manager for NMPF and the U.S. Dairy Export Council, in a Dairy Defined podcast.
Since the Ocean Shipping Reform Act passed the House last week, “We are focused on keeping up that pressure and ensuring both in Congress and both with the administration that there are fixes out there and the fixes are not just a one-time or one-off, that these are going to be some fundamental reforms that are much needed in this industry to ensure that this situation doesn't happen again,” Rice said.
Rice explains the complexities of challenges facing U.S. port traffic, with ships experiencing powerful financial incentives to quickly travel to Asia without carrying farm exports necessary to boost rural incomes and the U.S. economy. Rice also explains why public policy changes are essential, and how NMPF is working for full congressional package of reforms.
Alan Bjerga, NMPF: Hello, and welcome to the Dairy Defined Podcast. Exports are the future of dairy, with overseas markets taking a record share of US milk production this year. But enough about ex-ports. Let's just talk about ports -- because you can't sell overseas if you can't ship in the first place. And that's a problem for dairy right now, as the demand to get goods to the US fast is complicating dairy's efforts to serve overseas markets. Explaining what's going on and what dairy is doing about it is Tony Rice, NMPF's manager for trade policy.
Tony, let's start at the beginning. How did the ports crisis end up involving US dairy? And how does dairy's situation differ from what other parts of the economy may be facing?
Tony Rice, NMPF: This is a really good question and when I was home at Thanksgiving, I was talking about what I was up to, and the question came up about the supply chain issues and the ports crisis. And everyone was talking about store shelves not being stocked and no one was talking about exports. To give you a 30,000-foot view, this all started, we started hearing from our members about a year ago, late 2020, where they were having issues securing containers and finding cargo space on ocean carriers for their dairy exports. This happened as a lot more consumers were purchasing products online. The pandemic shifted a lot of consumer behaviors and a lot more products from China and Southeast Asia were being imported here into the United States.
This was unprecedented demand and in the past, there was a trade imbalance between the United States and Southeast Asia and China, but that trade imbalance exacerbated to the point where it became so lucrative to bring imports into the US that these ocean liners were turning around, trying to carry empty containers back as fast as possible without picking up US ag and dairy products. So this has been an issue driven primarily by the carriers themselves. There are market forces involved but it trickles down throughout the rest of the supply chain and it's created a number of issues. First and foremost, the shipping cost has gone through the roof for a lot of our dairy exporters, as well as unprecedented fees for detention and demurrage. These were tools originally used to provide, ironically, incentives for efficiency in the system. But now it's more of a revenue stream for these carriers that are being somewhat abused at the detriment of US dairy exporters.
And the last part of that is the difficulty in actually finding containers and, as I mentioned before, finding space on the ships. A lot of that's due to the lack of transparency. A lot of our exporters don't know when the ship is going to be in dock. They don't know when they're going to be able to get a container. They don't know when they're going to be able to drop off a container if they do secure one. With shifting timelines and unpredictability, it's been really difficult for our members and exporters to meet the deadlines that our customers set within the contracts, and it's been having issues all throughout this year. And unfortunately, they're happening now and are going to continue probably past Christmas and into the new year at this point.
Alan Bjerga, NMPF: There's a lot factors here, Tony, and clearly there's a lot to be untangled. Could you first define demurrage for us and why that is significant?
Tony Rice, NMPF: That's the fee assessed for when a container or a cargo box is left at the port where the carriers originally have a set of what are called free days, where you have a certain amount of time to pick up that container. But beyond that allotted amount of time, if you fail to pick it up, you're charged a demurrage fee. Now, the flip side of that is the detention fee where, if you take that container outside the port and it's held outside the port for too long, there's a fee associated with the number of days that it has passed its due date back at the port. And normally, these are really good guidelines to help exporters get their containers to the port in a timely fashion and have a quick turnaround. But unfortunately with these unpredictability and lack of transparency from the carriers, it's really difficult for our exporters to fall within the guidelines and then they find themselves slapped with these excessive fees that just pile up quite rapidly.
Alan Bjerga, NMPF: Can't the marketplace work this out?
Tony Rice, NMPF: That's a good question and normally that would be the answer, is the market would correct itself. But as you can see, it's been over a year now and the problem has just gotten worse over time. It hasn't fixed itself. And part of that is due to the fact that these ocean carriers, they operate in a captive market. There's really only 10 carriers that carry about 85% of the goods, both imports and exports from the United States and to the United States. And of those 10, it's really only three, since they operate on alliances. So as you can imagine, these carrier lines, to which I will make two notes of, one, they're all foreign flagged. They're all foreign owned. None of them are US based that carry agricultural products out of the West Coast. And two they're exempt from US antitrust and anti-competition laws.
So they are also are not subject to the regulations that many other free operating markets here in the US are subject to. There's not guidelines in place for them to follow the same rules and they don't have the interest of the American exporter in mind. And it draws the question of whether or not the stability of US exports and dairy exports and agricultural exports are reliant on foreign-owned or foreign-operated carrier lines. So that's a large concern for exporters and it's become very evident over the past year that these carriers in fact do not have the interest, our interest in mind, providing a lack of transparency that seems to be intentional, using the detention and demurrage system as an additional revenue stream, as well as using retaliatory measures and intimidation whenever some of our carriers file any complaints. So there's a fear of even speaking out against the carriers, because you might get slapped with a defamation lawsuit.
It's like David versus Goliath in the analogy here because a lot of our exporters are pretty small, from the Midwest through California and the East Coast as well, whereas these carrier lines that effectively have a monopoly on the market are dictating the trade flows for our exporters.
Alan Bjerga, NMPF: Now, despite all these shipping challenges you just outlined, it's important to remember US dairy exports are still on track for a record year in 2021. How does that reconcile with the challenges you just laid out?
Tony Rice, NMPF: This year has been a record year for exports, so we're on track to have unprecedented year in the terms of volume. About 17% of total milk solids is due to be exported in 2021 alone, but it does beg the question how much more we could be exporting without these challenges. And on top of that, it is interesting to note that with all of these challenges, it has cost our dairy exporters upward of $1 billion throughout just the first half of the year in just additional fees alone. That's not to mention the number of lost sales, rolled contracts, the loss of product quality because of a lot of these shipments of powder and whey and lactose and whatever it may be, they're sitting in the dock waiting on a ship, and then that booking gets rolled. It might get rolled once. It might get rolled twice. It might be a month, or two months, or even three months some reported, before that product reaches its final destination.
Dairy is a perishable product, and the quality goes down when it reaches its final customer. We've had a lot of these problems, a lot of reports from our members that they're losing sales at the detriment to US exporters and our competitors, namely New Zealand and the European Union, who haven't had as many issues exporting their product, they're taking up the slack. With growing international demand for all agriculture and dairy worldwide, it might be unjust to say, but we really are missing the boat in picking up those potential sales that we could be having, certainly in Southeast Asia.
Alan Bjerga, NMPF: So what solutions are we seeking to fix these problems?
Tony Rice, NMPF: Sure. This is a question we asked ourselves about a year ago, when we first heard our members. We decided to partner with the US Dairy Export Council, who, in trade policy issues we work hand in hand. We developed a Ports Working Group of members, a small group who work on the, excuse me, the logistics side of things on a daily basis. And we started to brainstorm what we could do to help resolve the issue. We hired a professional firm to partner with us as well, and we devised a few means of going about it, the multi-prong approach, if you will. We started communicating directly with the administration, including meetings with DOT, USDA and the White House, as well as the White House Ports Envoy for the Supply Chain Disruptions Task Force, John Porcari, to brief them on the issue and make sure that they're focusing not just on the imports and the empty shelves, but also on the export side of things.
And then the second approach we've been taking is with Congress. We started working with representatives John Garamendi from California and Dusty Johnson from South Dakota on a bipartisan approach to solve this issue. And just last week, we were proud to announce that after a few months of hard and quick work, we've been able to see the passage of the Ocean Shipping Reform Act of 2021. EUSEC and NMPF provided with the Reports Working Group as well as a number of other partners we've been working with in the ag industry input into this legislation on what solutions are actually available to give an agency who acts the policing force for these carriers, known as the Federal Maritime Commission or the FMC, some additional guidelines to make sure these carriers are abiding by the rules that, number one, are already in place while also making sure that the rules are sound themselves.
So what this bill would do is in three main buckets, it would provide additional transparency that's much needed into the timelines and carrier practices. Two, it would allow provisions to ensure that exports that are at the port and within safe carrying weights, and very importantly, contracted already to be shipped, actually go on the ship that it's contracted to be exported on. We've seen a lot of canceled contracts simply because a lot of these carriers prefer to return the empty containers back to Asia to receive that premium price instead of loading ag exports.
And then the third piece of this would be on the fees, the detention and demurrage fees. Since a lot of it is an automated system that's spitting out these fees that sometimes are outside of the exporter's control, say, if you go to pick up a container at the port and it's buried under a stack of containers and they tell you to come back two days from now, you might end up getting charged demurrage because you were unable to pick it up. Or vice versa, you weren't to get your container actually into the port because there was so much congestion. A lot of our exporters are just getting slapped with fees. This legislation would provide a requirement that those fees are certified to be within the guidelines that are already established for what's considered reasonable and make sure that a human eye actually looks at those fees before they're issued.
So that's the congressional piece we're continuing to press to build upon that important language in the Senate and we have already commitments from some senators on legislation. We're going to make sure that the urgency is still there and make sure the focus remains on the exports, both for a short-term solution as well as in the long term, because this is not just a matter of getting product out now. It is a matter of we're losing sales far into the future if we're unable to meet the requirements of US dairy customers overseas. And the reliability of and the reputation of US suppliers is at risk if we don't fix it.
Alan Bjerga, NMPF: So speaking about the future, and you have House passes, you're working to build momentum in the Senate, meanwhile these strains and these stresses continue. When could we reasonably expect things to get better?
Tony Rice, NMPF: Well, we don't expect it to be resolved and we don't expect the legislation or any of the work from the administration to be the silver bullet on solving these issues. We do think that there is light at the end of the tunnel and that with some stronger rules and guidelines about what carriers can and cannot do that are reasonable and making sure that they are intentionally not shipping US goods, we have some hope for the future in that this problem will be resolved hopefully within the next year, but it's difficult to say. We are focused on keeping up that pressure and ensuring both in Congress and both with the administration that there are fixes out there and the fixes are not just a one-time or one-off, that these are going to be some fundamental reforms that are much needed in this industry to ensure that this situation doesn't happen again.
Alan Bjerga, NMPF: We're speaking with Tony Rice, NMPF's manager for trade policy. Thanks for your time, Tony.
Tony Rice, NMPF: Thank you.
Alan Bjerga, NMPF: And that's it for today's podcast. For more on NMPF's policy priority, visit nmpf.org. And for more of the Dairy Defined Podcast, this podcast is on Apple Podcasts, Spotify, SoundCloud, and Google Play, all under the podcast name Dairy Defined. Thank you for joining us.