Transporting grain from the United States (US) Corn Belt to Asia is predicted to become significantly cheaper once an expansion of the Panama Canal is completed in the summer of 2015. Ships laden with 25 percent more grain will be able to pass through, lowering shipping costs and time. This will be a boost to US Gulf ports, which have lost out to the increased efficiency of the US Pacific Northwest in recent years. But other countries could also benefit.
The Panama Canal is undergoing a multi-billion dollar expansion, which will enable significantly larger ships to transit between the Atlantic and Pacific Oceans when construction is completed in the middle of 2015. Some of the main beneficiaries will be the US Gulf ports, a new report from Rabobank, Panama Canal: Expanding the Gateway for US Grain to the East, says. According to report author Will Sawyer, the increased shipping capacity will result in a shift in transport routes to the Panama Canal by the way of the US Gulf, and greater cost competitiveness for US grains. “Over the last fifteen years, the US Gulf-Panama Canal trade route and the US as a whole have missed out on the growth in global grain trade. Shipments through the US Gulf accounted for nearly 80 percent of US grain exports in the past, but due to demand growth in Asian markets and the increased efficiency of the US Pacific Northwest (PNW), that share has since fallen to between 60 percent and 65 percent. The expansion of the Panama Canal and the resulting lower shipment cost and time, will greatly improve the cost position of the US and deliveries through the US Gulf.”
A greater catchment area
One of the benefits for the US Gulf ports is the doubling of the draw area in the key grain producing states of Minnesota, Iowa and Missouri, allowing the ports to take back much of the export share that has been lost to the PNW over the last 15 years. Most of this shift will be driven by increased corn exports through the US Gulf, reversing the recent trend. According to the report, the increased ship capacity driven by the Canal expansion will take the draw area in these three states from 25 percent of annual corn production to 50 percent and from 28 percent to 48 percent for soybeans. Currently, the US Gulf accounts for about 65 percent of total US grain exports, 75 percent of corn exports and 65 percent of soybean exports. This is about a 10-point decline from 15 years ago that was lost to shipments through the PNW. However, the impact of the Panama Canal expansion on US export volumes is more challenging to quantify, according to Sawyer. He says that on the supply side their is the volatile weather conditions in recent years, the rapidly expanding export potential of Brazil and the Former Soviet Union states, and concerns over the true US yield potential all creating uncertainty around US export potential. On the demand side, there is ambiguity over the future of the US ethanol mandate and China’s tightening grain balance sheet. These factors have and will continue to make the outlook for US grain exports very difficult to forecast.
Looking beyond the United States, Sawyer explains that the Canal's expansion will also have shipping benefits for Brazil and, to a lesser extent, Argentina. “Together, Brazil, Argentina and the US account for the lion’s share of global grain trade from the Americas, but the US is a much bigger user of the Panama Canal. Exports from Argentina to Asia predominately go around the Cape of Good Hope in South Africa rather than through the Panama Canal. This is also true for Brazil, where crops are transported by truck to the Southern ports of Santos, Paranagua and Rio Grande rather than travel north through the Panama Canal. Even shipments from Manaus, along the Amazon River in northern Brazil, frequently go by way of the Cape of Good Hope to get to Asia despite the route through the Panama Canal being shorter. This is due to the poor inland and port infrastructure in northern Brazil, toll charges through the Panama Canal and the ship capacity limitations of the Panama Canal locks. Brazil has numerous projects aimed and improving its domestic export infrastructure, but these projects are years away and their completion is uncertain,” he explains.
For more information, contact Will Sawyer.