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  1. Home
  2. / Markets
  3. / Commodities

A Wet South America Is Good for Dry Bulk

Shipping rates soar, aided by bumper soybean crop in Brazil and Argentina.
By JIM COLLINS
Apr 08, 2016 | 02:00 PM EDT
Stocks quotes in this article: NM-G, SBLKL, DSX-B

The Dry Bulk Depression continues to be erased from memory as shipping rates have skyrocketed since their nadir on Feb. 10. Today's London afternoon fixing put the Baltic Dry Index at 539, a full 86% jump from its position on Feb. 11. Importantly, the index's gain today was driven by an astounding 17% one-day gain in the bellwether Baltic Capesize Index.

Capes lagged in the first month of the dry-bulk bounce-back, and the shipping industry insiders I speak with regularly continued to caution that it wouldn't be a real recovery until Capesize prices rebounded. Those are the largest ships to have a sub-index and the pricing mechanism historically has been based on the idea that a ship should be valued on the tonnage it can carry. Makes sense, but those rules went out the window with the late 2015/early 2016 crash in dry bulk, and as of today's fixing, Capes are still trading at a small discount to Panamaxes despite their ability to carry 60% more cargo on average.

So I'll keep watching Capesize rates on a daily basis. Rather than posting countless, breathless index price updates on Real Money, I'd like to explain why shipping rates have recovered from levels that had seemed to sentence all dry bulk shipping companies to calamity, catastrophe or at least bankruptcy.

Excluding the general upward revaluation in risk assets globally since Feb. 11's "Dimon bottom" and record recent levels of scrapping of older dry bulkers, especially Capesizes, there is a much more prosaic reason for dry bulk's revival: It rained in South America in the first few months of 2016. A lot.

The high levels of precipitation in Brazil and Argentina -- especially late in the Southern Hemisphere's growing season -- led to a strong soybean crop. The USDA has estimated a 4% year-on-year increase in Brazil's soybean harvest this year, and Argentinian agricultural exports have risen sharply as the Macri government has emphasized market-based economic policies.

Those soybeans are mainly headed to China, in what is the ultimate form of global arbitrage. Growing soybeans, like many crops, requires an intense amount of water per ton of product, and that is something that Brazil has in ample supply -- according to the Energy Information Administration, hydropower supplies more than three-quarters of Brazil's electricity needs -- in most years, and especially in an El Niño year like the current one.

Coincident with the strong harvest, the global markets have seen a strong rally in prices for iron ore, another commodity sent via dry bulk ships. Mining.com this week quoted Chinese high-grade iron prices at $53.80 per metric tonne, which represents a 25% increase in price year to date and a 45% jump since the mid-December lows for the ferrous product.

So it's a bullish time for dry bulk, and I've been putting my clients primarily in exchange-traded fixed-income securities of dry bulk companies for the past month. Navios Preferred Series G (NM-G) continues to perform well as my Real Money top pick, and I have also been investing in Star Bulk's 8% 2019 Senior Notes (SBLKL.)

Of special note, I have also been buying the 8.875% Series B preferreds of Diana Shipping (DSX-B) this week. These preferreds are trading at about 64 cents on the dollar ($16 vs. a $25 par) and pay out $0.555 per quarter. The next payment is April 15, and the shares will go ex-dividend on Tuesday, so if you want that payment you must buy DSX-B today or Monday. It's an annualized yield of almost 14%, or put another way, if you buy DSX-B Monday you'll receive about 3.5% of your money back on Friday if -- Diana doesn't publicly announce payments -- the dividend is paid, as I believe it will be.

It would take you about 1.5 years to earn a 3.5% yield on the S&P 500, so doing it in the space of a week by adding exposure to an industry with wildly improving fundamentals seems like an easy trade to me. That's why I've been making it.

Drop me a line at jim@portfoliogurupost.com if you decide to do so yourself.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Collins was long NM-G, SBLKL and DSX-B, although positions may change at any time.

TAGS: Commodities | Markets

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