A friend was telling me about a conversation he had recently with Allen Oberg, Chairman of the board of directors of the CWB. Frustrated by seeing durum vessels on demurrage, my friend suggested that the senior staff should pay for the demurrage out of their own pockets. According to my friend, Oberg responded by asking "should we give them the despatch as well?"
I doubt Mr. Oberg knows what he's suggesting.
Demurrage is a penalty paid by the shipper to the vessel owner for taking longer to load a vessel than you had negotiated. Despatch is a payment from the vessel owner to the shipper for loading faster than negotiated.
The CWB gets both in a typical year - demurrage on some vessels, despatch on others. The CWB reports these two income/cost related factors in the annual report as a net figure - one subtracted from the other. So, in 08-09, when the CWB racked up $7.6 million in demurrage charges and $15 million in despatch "earnings", it reported a "net despatch" figure of $7.4 million despatch. In other words, the CWB reported only that its despatch "earnings" were greater than the demurrage charges by $7.4 million. It looks like, on balance, it was a positive year when it came to loading vessels.
But the CWB leaves out an important factor, and I'm guess Mr. Oberg doesn't realize it or is looking the other way on purpose.
To earn despatch, the CWB takes less time to load a vessel that it negotiated for. But despatch doesn't cover the cost of the loading time that the CWB negotiated for in the first place. When you say you need 6 days to load, the effective ocean rate you get factors those 6 days into the total costs. The more time you negotiate for, the higher the cost.
SO - when you say you need 6 days to load, guess what? You PAY for six days.
And when you use only 4 days to load, you get despatch for the two days you didn't use (but you still pay for them).
ALSO - despatch is only a PARTIAL REBATE of the charges for those days not used. Typically it's half the freight rate (or less).
Here's the thing that Mr. Oberg doesn't understand: when you get paid despatch, it has actually cost you.
When the CWB reports despatch payments without considering the full expenses , it gives an incomplete picture.
SHIPPERS SEE DESPATCH AS A LOSS. NO ONE SETS OUT AHEAD OF TIME TO EARN DESPATCH, BECAUSE ITS SO COSTLY. CERTAINLY NO ONE ELSE SETS OUT EARNING DESPATCH AS A CORPORATE GOAL LIKE THE CWB DOES.
For the CWB to "earn" $15 million in despatch in 08-09, its safe to estimate that this represents excess loading days that cost the CWB in excess of $35 million. After getting the despatch payments, the CWB paid out $20 million for loading time they didn't need.
For 08-09, add the demurrage charges to the actual depatch costs and the situation was likely over $40 million in losses.
Over the last five years, demurrage and despatch (including the freight cost) would likely total more than $250 million in LOSSES. Because the CWB does not report the total despatch situation, it reported a net demurrage and despatch of $26.7 million gain.
With all due respect to Mr. Oberg, I doubt he understands the true nature of despatch. I wonder if others on the board do either. If they did, why would they set a goal to earn $4.5 million in despatch each year? Clearly they don't know that in reality, what they have set is a goal to lose at least $10 million a year and likely much more.
I guess it just looks better than demurrage.
I have written a detailed report on how the CWB manages demurrage and despatch and how they could improve farmers bottom lines by making changes. Drop me an email if you want to receive a copy.
Twenty years ago the CWB tended to pay more demurrage on an annual basis and was severely criticized for that. The amounts were not large in relation to the values of an annual sales program.Now the CWB collects despatch and is cricized for that. But the amounts are not large relative to the size of the crop. As you are writing this blog we can assume you have not made a billion as some have hitting the highs and lows perfectly.Yes, ideally you would like to be in a position where you are an infinitesimally tiny amount away from having to pay $1 in demurrage in a year. Mr. DePape, if you can make those calls and achieve that objective you can make $50 million per year, at least. The pay for the criticism of a Monday morning quarterback is far less.
ReplyDeleteI am not criticizing the CWB for collecting despatch, I criticize the CWB for setting a goal to earn despatch. I've been in the business for a long time - I've talked to a lot of people in the grain trade and in the shipping business. I can find no one else that actually sets out to earn despatch, like the CWB does. As I said in the piece - everyone else seems to know that it actually comes at a hefty cost.
ReplyDeleteI also criticize the CWB for reporting despatch as if it were some great feat to earn it. At farm meetings last winter, directors were reporting that the despatch number was an indication of how well the CWB did in logistics - without explaining that there is a cost side to it.
There are two ways to earn despatch. First, by negotiating load times and second, by executing faster than you negotiated.
You can negotiate inefficient terms giving you a large window to load, practically guaranteeing despatch (but with a higher cost). Or you can negotiate efficient terms. Some shippers will negotiate such tight load terms that they almost always pay a bit of demurrage - this is actually better (for the bottom line) than earning a bit of despatch.
You can see I disagree with you about being "an infinitesimally tiny amount away from having to pay $1 in demurrage".
My main criticism is that either (1) the CWB board of directors don't understand any of this or (2) they understand it and prefer to report despatch because they can make it look better. (I know CWB management prefers to report despatch because the board prefers to see it.)
You tell me which it is.