The recent heat wave and drought that swept through Europe have had a severe impact on the region's grain production.  Both the International Grains Council and the U.S. Department of Agriculture have lowered their estimates of this year's European grain output by 10-15 million tonnes, or about 5%, since mid-July.

This could have a moderate impact on the dry bulk market, depending on what happens in response.  If European grain imports jump, as they did in 2002, this could lead to higher freight rates than we are calling for in our July Base Case.  Specifically, if European grain imports increase by 8 million tonnes relative to the Base Case, Panamax spot earnings would climb by an additional $1,000 per day during the next few months, while Cape rates would most likely gain an additional $2,000 per day.

However, at this time, neither the IGC nor the USDA expects European grain imports to rise very much.  Instead, both organizations expect European grain exports to be reduced sharply.  Most of these shipments typically go to Africa, and any shortfalls would most likely be made up by increased supplies from both the U.S. and Australia.  Since such a shift in trading patterns would involve only a small increase in the average trading distance, such a scenario would not have a very large impact on dry bulk market freight rates.

We will discuss this issue further in our August Dry Bulk Market e-brief, which is scheduled to be published during the first week of September.

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