Panama Canal expansion to lower cost of shipping grain

by World Grain Staff
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UTRECHT, NETHERLANDS — Rabobank released a report on Dec. 11 that forecast the completion of the expansion of the Panama Canal would result in 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. 
 
The Rabobank report, "Panama Canal: Expanding the Gateway for U.S. Grain to the East," indicates that 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 Rabobank Analyst Will Sawyer 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. versus Brazil, Argentina and other grain exporting countries in Eastern Europe.  
 
The effect on overall US export growth is harder to quantify, with ambiguity and volatility surrounding both supply and demand factors. 
 
"We see the US Department of Agriculture's (USDA) baseline projections of under 1% export growth for soybeans and 5%  for corn over the next decade as best case scenarios," said Sawyer. "The expansion of the Canal may help the US retain soybean export volume, but South America will still enjoy a considerable cost advantage. Despite the anticipated improvement in transaction costs, for corn exports to both grow and gain market share as projected, we think a reprieve from the US ethanol mandate will be needed to help free up supplies."


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