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Figure 2-9 shows the maritime disruptions in relation to the increase of shipping freight rates due to natural reasons and the shortages of dry bulk ships in the wheat supply chain between Australia and Indonesia during 2006-2008. In this period, recurrent maritime disruptions resulted in significantly higher prices in the wheat and flour market, especially to Indonesia‟s consumers.

In 2006-2008, due to the severe effect of drought, the harvest quantity of Australian wheat was approximately only at 11 million tonnes (at the end of 2006) compared to 24 million tonnes in 2005. This nature-based wheat disruption increased the prices of wheat in the range of 50 to 60 per cent during 2006-2007 (BULOG 2007). Following the drought, in January 2006 the price of hard wheat (APH1 and APH 13) was about US$ 170 per tonnes FOB to Indonesia (as in Drewry 2007; Fearnsearch 2007; APTINDO (Asosiasi Produsen Tepung Terigu Indonesia) 2008). Further, in October 2006, the price rose more rapidly to US$ 227 per tonnes FOB. If the trading term based on CIF in 2007 is compared to the January 2007 price, the wheat level achieved US$ 326 per tonnes CNF in contrast to US$ 212 per tonnes CNF in January 2006 (Drewry 2007).

More significantly, the shipping sector, especially ocean carriers, contributed considerably to the increase in wheat prices in the period of February 2007 – February 2008. The increase of wheat prices due to maritime-related operations was nearly 102 per cent (if the CNF wheat price is considered). The main reason for this impact is due to an imbalance in the dry-bulk shipping market which started in the middle of 2006, and subsequently created a significant increase in the charter rate for the dry bulk fleet especially for Panamax and Handymax (for example Blas 2007; BULOG 2007; Clarkson 2007; WEA 2008).

Between January and September 2007, the cost continued rising from US$ 54 to US$ 95 per tonnes which represents an increase of approximately 76 per cent (Blas 2007; Clarkson 2007). However, millers and wheat traders in Indonesia were not able to respond to this increasing trend directly by an increased selling price of the flour

because of the relatively low ability to pay by Indonesian consumers (Peter 2007; Siagian 2007). During 2006-2007, Bogasari Ltd, as the biggest wheat-miller in Indonesia, increased the selling price of their flour product to the market by only 12 per cent which was significantly far below the expectation of 76 per cent. Therefore, it appears that maritime disruptions due to the shortage of dry bulk ship increases the commodity price of wheat, transport and supply chain costs and subsequently reduces the profitability of entities across the chain.

170 227 235 224 ₂₁₂ 219 231 264 341 345 349 384 422 464 212 243 251 273 288 302 325 350 ₄₃₄ 460 474 500 530 552 0 100 200 300 400 500 600 $ U S p e r to n n e s FOB CNF Natural problems Demand factor + Diversification Sea transport gap

Maritime disruptions

Period

Figure 2-9. The 2006-2008 trend of Indonesian wheat prices due to maritime disruptions

Sources: APTINDO (2009); Edijatmiko (2007); FAO (2008); Gunawan (2007); WEA (2008)

In responding to the above disruptive factors of maritime operations, the wheat industry, especially between Australia and Indonesia, has been using containerised wheat transport in contrast to the dry bulk pattern that had been creating a substantial problem for the wheat trade. In addition, entities in the wheat supply chain recognised that exploiting bulk shipping and dry bulk terminal operations was presumably no longer able to provide optimal benefits, sustainable growth and competitive success when compared to containerised shipping due to its loss of economic scale (Ray 2007). Further, the transportation costs of using containers can possibly be reduced further if

the volume of container traffic reaches levels at which economies of scale can be obtained with the assumption that there will be no supply disruptions due to drought (Abbas & Aly 2004; Song et al. 2005). It was reported by APTINDO (2007) that the monthly demand by wheat buyers in Indonesia was about 275,000 tonnes with 20 per cent of this quantity being transported by containers.

However, despite the increasing usage of containerised shipments, the container imbalance in the wheat trade may limit the effectiveness of the containerised option. In relation to the availability of containers, particularly in Australia, there is an imbalance in container trade between Asia and Australia, which results in a continuous repositioning of empties to Asia from Australia. Annually, there are about 200,000 empty containers left in Australia with an estimated five million tonnes of capacity (WEA 2007). Hence the transformation of bulk cargo transport to containerised transport has been a reasonable alternative to the higher freight rate of bulk shipping during 2006-2007. The other important impact of these maritime disruptions was the result of longer transportation time (delays) during the wheat distribution process especially in reaching rural consumers in inter-islands‟ locations in Indonesia. It was reported that in September 2007, the longest period that consumers waited for the supply of flour and wheat related products in Indonesia was about 30 days (Edijatmiko 2007; Siagian 2007; WEA 2007). In Australia, the average span of delays in the same period was 14 days due to two important activities, namely rail transportation and loading operations at wheat terminal operations (WEA 2007, 2008).

During 2005-2006, Australian wheat farmers complained about the slow performance and limited capacity of the national rail system (CSIRO 2007; DFAT 2007). These reports indicated a limitation of carrying volume for wheat transportation including the insufficient number of trains allocated to each of the relevant ports of Portland, Geelong, Melbourne and Port Kembla. This is due to the reduction in a number of wagons allocated by Pacific National to those ports (CSIRO 2007). As a consequence, the transport capacity of rail services for the wheat chain in Australia was decreased. Also under investigation was the bottlenecks in Australian port infrastructure in relation to the wheat chain (CSIRO 2007). As reported by the Commonwealth Scientific and

Industrial Research Organisation (CSIRO), which surveyed the food logistics progress in Australia in the period of 2004-2006, four main problems exist. These are; (1) the drought problems for certain ports, especially those terminals handling wheat based commodities; (2) the insufficient capacity of the rail track to ports with the need to be heavy duty rail; (3) lack of road access to ports, and (4) urban encroachment around grain terminals which affects port handling operations. Consequently, these infrastructure-related problems in Australian ports have created considerable congestion effects in the supply chain with significant delays at all Australian dry bulk terminals, for on average a total of six days in September 2007 (G-Ports 2007). Interestingly, due to these factors, growers in Australia have to bear the commercial consequences of their business. As stated by one grower: “We're also seeing substantial increases in freight and supply chain costs which we as growers have to bear ourselves” (Jenkins 2009, p.12).

The other important factor is the small parcel size for wheat regularly demanded by Indonesian small millers in containerised form (APTINDO 2003). Consequently, these small millers need a particular shipping arrangement for small parcels of imported wheat in the range of 4,000-5,000 tonnes per month. Therefore, it is neither appropriate nor efficient to use either Handymax or Panamax ships which have the minimum carrying capacity of more than 40,000 tonnes per shipment (Peter 2007; Siagian 2007; WEA 2007). In response to this, the common strategy implemented and practised to date by wheat shippers and consignees is to share the space on a dry bulk ship. Another alternative is to use bags or flexible intermediate bulk containers (FIBC) for bulk movement (FIBCA 2004; APTINDO 2007). In Indonesia, the disruptive factors in maritime operations that generate further widespread impacts for domestic wheat distribution are the congestion problems of inland access to and from the main ports of Indonesia, the congestion within ports itself, and problems of inter-island networks of ferry and short sea shipping services (see Figure 2-10).

In relation to the wheat trade, Indonesia has more complex problems with port infrastructure than Australia due to limitations of port draught, narrow channel problems, and high port waiting levels caused by the lack of terminal availability. In terms of inland transport systems, this is the most disadvantaged area for Indonesia

because of the lack of rail facility and connections to support port operations in general and the wheat handling process in particular. Moreover, port congestion in Indonesia as discussed by Gurning (2008, p. 112) reveals various aspects such as the „lack of terminal storage, limited draught of berth, and lengthy customs procedures‟ affecting cargo handling services in dominant ports managed by Indonesian port corporations. These factors subsequently become major reasons for the increase of terminal handling charges by shipping companies, container handling charges by terminal operators and longer ship time at ports (Ditjenhubla (Direktorat Jenderal Perhubungan Laut) 2006; Patunru et al. 2007; Gurning 2008).

Figure 2-10. Maritime disruptions in the Australian-Indonesian wheat supply chain. Source: Gurning and Cahoon (2009)

In terms of domestic distribution, in the period of 2006-2008, the wheat supply chain was interrupted by natural factors such as severe wave height and wind in the Indonesian waters. Information and reports provided by Badan Metorologi dan Geofisika Indonesia (BMG) during 2007-2008 reported a trend of severe wave height of on average more than three metres, mostly in Indonesian waters (BMG 2007, 2008). During this period, the BMG further reported a trend of tropical storm interventions across Indonesian waters which had never occurred before. These consequently generated several marine navigational warnings (Maklumat Pelayaran in Indonesia) by

the Ministry of Transport of Indonesia. It was calculated that during 2007-2008 there had been seven navigational warnings which halted shipping operations.