Upon completion of the expansion of the Panama Canal, the cost to transport grain from the U.S. corn belt to Asia will drop by an estimated 12%, thus increasing the cost competitiveness of the U.S. as a grain exporter to Asia, Rabobank forecasts.
In a new report, “Panama Canal: Expanding the Gateway for U.S. Grain to the East,” Rabobank says the expansion of the Canal will accommodate grain-laden ships from the U.S. of 25% more capacity than before, resulting in a shift in U.S. grain shipping routes that doubles the draw area west of the Mississippi River for exports through the Panama Canal.
Rabobank predicts the decline in shipping cost, coupled with the increased capacity, will help ports along the U.S. Gulf to regain export volume lost to ports in the Pacific Northwest over the last decade, and also benefit large grain traders and exporters with operations in the U.S. Gulf region. Ocean freight accounts for 60% of total shipping cost, so increased shipping capacity has a material effect on cost savings.
The Panama Canal is the main artery for U.S. grain exports, with the U.S. Gulf currently accounting for about two-thirds of volume. For decades, the shipping route from central U.S. corn belt down the Mississippi River to the Gulf and through the Panama Canal has been the dominant avenue for U.S. grain exports. However, with the rising importance of Southeast Asia in the global grain trade over the past decade, the U.S. Pacific Northwest has taken more than 10% market share from U.S. Gulf ports over the past decade.
“The Panama Canal expansion is great news for American competitiveness,” said Will Sawyer, Analyst with Rabobank’s Food & Agribusiness Research and Advisory group, and author of the report. “Whereas nearly 80% of U.S. grain exports went through the U.S. Gulf a decade ago, demand growth in Southeast Asia and increased efficiencies at U.S Pacific Northwest ports have reduced that market share to between 60% and 65% currently. The Canal expansion and resulting decreases in shipment cost and time will greatly improve the cost position of the U.S. vis-à-vis Brazil, Argentina and other grain exporting countries in Eastern Europe.
“The expansion is also positive for U.S. Gulf ports,” Sawyer continued, “as the doubling of the draw area in Minnesota, Iowa and Missouri will allow U.S. Gulf ports to take back much of the export share lost to the Pacific Northwest over the past 15 years. Most of this shift will be driven by increased corn exports through the U.S. Gulf, reversing the recent trend.”
Detailed findings from the report include:
- More than $225 million in U.S. transportation costs saved: The expansion of the canal will push down the cost of shipping a bushel of corn or soy from the U.S. to Asia from approximately $2/bushel to $1.75/bushel. With an estimated 900 million bushels of grain shipped each year, the actual cost savings to U.S. grain traders and exporters will be $225 million annually, a significant benefit to companies in the sector.
- Doubling of the Draw Area in Minnesota, Iowa and Missouri. The Canal expansion is expected to approximately double the overall “draw area” in these three grain producing states to 50% of all corn acres (up from 26% currently) and 48% of all soybean acres (up from 28% currently). The doubled draw area will comprise 15% of total corn and soybean acres in the U.S., up from 8% currently.
- U.S. Gulf ports to reap growth, Pacific Northwest ports to remain flat: Over the next decade, the estimated share of U.S. grain exports from the Gulf region is expected to rise to 72% of total grain exports. This increase will come mainly from a rise in U.S. grain exports overall, rather than from cannibalization. Pacific Northwest ports will hold onto the export volume won from the Gulf region over the last 15 years, but are expected to lose market share even as volume remains steady, as the growth in expected U.S. grain exports over the next decade routes primarily via the Gulf.
- Uncertain Impact on Overall Exports. The effect of the Canal expansion on overall U.S. export volume is harder to quantify, with weather volatility, export growth in Brazil and Eastern Europe, and concerns over U.S. yield potential clouding the U.S. export picture. The demand side is equally murky due to changes in the U.S. ethanol mandate and China’s grain stocks. Rabobank views USDA baseline projections of less than 1% growth in soybean exports and 5% growth in corn exports over the next decade as best case scenarios.
- Room for Growth. If corn exports climb by 4.5% per year as the USDA predicts, exports from the Gulf could rise close to 6% per year. This would imply nearly a doubling in U.S. Gulf exports from the levels of the 2011/12 crop year. However, Rabobank sees little risk that U.S. Gulf ports will reach capacity constraints. Even with increased grain exports expected for the 2013/14 crop year, Gulf ports will be at only 65% to 70% of capacity, meaning there is ample room to handle further growth.