How Shipping Carriers Are Making A Killing on Food Aid?

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In April, the Biden Administration announced $670 million in food assistance to countries slammed with rising costs for necessities like wheat, in response to a global hunger crisis that threatens starvation and political unrest. Less than half of that spending is actually going to food procurements, however, since $388 million is needed to pay for processing and shipping, reports The American Prospect.

Food aid

Delivering food aid to remote and conflict-riddled regions is expensive and tricky, particularly as post-pandemic logjams continue to clog ports and raise ocean carrier profits in a notoriously concentrated industry. But the cost of shipping food relief is being driven dramatically higher by a policy carveout for domestic shipping carriers. Cargo preference requirements impose a costly subsidy for the U.S. maritime industry on the international development agency, USAID.

“It’s high seas robbery,” said Chris Barrett, an agricultural and development economist at Cornell, of the cargo preference rules that sit atop already record-high profits for freight carriers. “Imagine that you have a sick family member who is quarantined at home with COVID, facing a real problem, and you want to order a meal for them, and the meal delivery charge is greater than the value of the food.”

What is intended as a protectionist rule has also, ironically, increased profits for foreign corporations such as the Danish shipping giant Maersk, which in recent years has carried more than half of packaged food aid shipments from the United States.

At least half of U.S. humanitarian food aid

It  must be carried on privately-owned, U.S.-flag registered vessels, in accordance with the Merchant Marine Act of 1936 and the Cargo Preference Act of 1954.

The U.S. maritime industry and other proponents of that cargo preference mandate say it helps maintain the domestic shipbuilding industry, and that it is crucial for military preparedness, ensuring an adequate reserve of skilled mariners and vessels.

Yet cargo preference has not proved very effective at sustaining a declining merchant marine. The current U.S. fleet only counts four dry bulk ships, three of them owned by Liberty Maritime Corporation. This severely limits options available for shipments of key commodities. Having to tap a pool of older, slower vessels for aid transport has delayed the delivery of emergency food.

Cargo preference also appears to have done little to spur domestic shipbuilding: A recent American Enterprise Institute study found that of 273 vessels eligible for cargo preference, only four were built in the U.S.

A further reason cargo preference hasn’t helped sustain a merchant marine is that the provision of food aid itself has dwindled. Barrett testified before Congress that there has been a 76 percent decline, in inflation-adjusted terms, in U.S. food aid programs since the heyday in the 1960s. Over the same period, shipping has gotten relatively more expensive, making the dropoff in the share of dollars directed to food even steeper. As a result, giving U.S.-flagged ships priority rights to move food aid doesn’t boost business very much.

Even the Department of Defense has acknowledged that “There would be no significant impact to DoD in the loss of bulk ships used to transport food aid.” While it does little to sustain the U.S. surge fleet for wartime, analysts including the Government Accountability Office have shown that cargo preference drives up prices.

Through a bidding system, U.S.-flagged vessels are eligible to bid first on contracts to transport food, leading to a significant markup over international freight costs. Absent offers from American ships, bids from foreign-flag vessels are considered.

Overseas carriers have discovered workarounds, however. While ships registered as U.S.-flagged must technically be owned by an American company, that company can also be a subsidiary of a foreign corporation under a status called “documentation citizen.” Ships are often owned through private holding companies, making it difficult to trace the corporate parentage of eligible ships. Barrett and other Cornell researchers attempted to do that in a 2006 study. Using public data, they were able to confirm ultimate ownership on a number of ships, which represented about 43 percent of food aid transported that year.

“Almost 40 percent of the tonnage we can definitively link to ultimate owners was hauled on vessels whose companies are owned by foreign corporations. Since these are limited liability companies incorporated in the U.S., the business risk remains in the U.S., including with U.S. mariners, while the profits move offshore to the corporate parent,” the study found. “These profits are then reinvested in the corporate parent’s entire fleet. Thus, [cargo preference] indirectly supports vessels that compete directly with U.S.-flag vessels.”

Maersk

The Danish container giant Maersk is a key player in both the U.S.-flag cargo preference segment of the food aid market, and the non-cargo preference segment. Between 2013 and 2018, Maersk carried 55 percent of packaged food, on both U.S.- and foreign-flagged vessels. And it charges more for moving food aid on U.S.-flagged ships.

The AEI study found that the “Maersk mark-up” for U.S.-flagged cargo preference shipments over non-cargo preference shipments made on Maersk’s foreign-flagged vessels averaged 47 percent, or $65 per ton of freight.

Data shared with the Prospect on the largest U.S. food aid program, USAID’s Title II Food for Peace, shows that Maersk has carried 89 percent of packaged food shipments so far this year. It has sent these on U.S.-flagged ships including the Maersk Hartford and Maersk Denver. (Maersk doesn’t carry bulk food aid).

Maersk Line Limited, the company’s fleet of U.S.-flagged vessels, “has a great history and positive dialogue with USAID,” Maersk said in a statement to the Prospect. “The objective of USAID is not that far off from Maersk’s own purpose where we wish to integrate global logistics, improve the flow of the foods, goods, data, medicine, PPE and materials that sustain people, businesses and economies.”

Maersk has seen record profits in the first several months of this year, riding off high freight rates and tight shipping markets as consumer demand roared back after the pandemic.

Broader crackdown

A broader crackdown on shipping carriers is underway.

“Every once in a while, something you learn makes you viscerally angry. Like, if you had the person in front of you, you’d want to pop them. No, I really mean it,” President Biden said earlier this month in a speech at the Port of Los Angeles.

The president was describing the nine major shipping companies, which coordinate in three alliances, that control most global container capacity. Those carriers raised their prices by as much as 1,000 percent during the pandemic, Biden said, but “the rip-off is over.”

Last week, Biden signed a bipartisan effort to crack down on shipping cartels called the Ocean Shipping Reform Act, which gives the Federal Maritime Commission (FMC) new authorities to regulate ocean carriers that refuse American cargo and to investigate anti-competitive practices.

Stephanie Mercier, an agricultural policy expert and co-author of the AEI study, said she is cautiously optimistic that the reforms will make shipping more competitive, depending on how vigorous the FMC is in using its new authorities.

Cargo preference was left out of OSRA. But for the first time since the 2013 Farm Bill, there is a bipartisan legislative push to address the subsidy. Rep. Jackie Walorski (R-IN), Sen. Chris Coons (D-DE) and others have introduced a resolution to waive cargo preference in light of the Ukraine invasion.

The idea faces opposition from unions like Transportation Trades Department of AFL-CIO, which represents crews on U.S. ships and argued in a recent letter that the Walorski bill “would cede U.S. food-aid and shipping interests to foreign-flag ships… [and] endanger the jobs of civilian merchant mariners, creating the distinct possibility that there will not be enough mariners to meet military surge and sustainment requirements for future military conflicts.”

Despite the steep decline in aid, the United States remains the world’s largest provider of emergency food. Like Maersk’s supersized container vessels, U.S. aid policy is massive and slow to turn.

NGOs fear losing aid dollars and have been longtime allies of U.S.-flag shipping carriers earning a premium on food. Along with the farm lobby, that coalition has been uniquely effective at averting change—for example, by keeping parts of food aid with the Department of Agriculture, rather than with international aid organizations, as has happened in other donor countries.

Whether urgently needed food continues to be shipped at exorbitant cost will depend on whether the powerful “iron triangle” of NGOs, agribusiness and shipping carriers can be overcome.

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Source: The American Prospect

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