Drought in the Panama Canal Expected to Postpone Grain Shipments Until Late 2024

U.S. grain shippers face increased costs and longer transit times, rerouting from the Panama Canal to alternative paths due to severe drought-induced congestion and elevated transit fees.

Panama Canal

11/12/2023.- Aerial photograph showing the port of Balboa in the Panama Canal (Panama). EFE/Welcome Velasco

The Latin American Post Staff

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Leer en español: Se espera que la sequía en el Canal de Panamá posponga los envíos de granos hasta finales de 2024

The U.S. Gulf Coast's Grain Export Challenge

The U.S. Gulf Coast, a pivotal export hub for American grain to Asia, is currently navigating a critical logistical challenge. Bulk grain shippers are forced to adopt longer, more expensive routes to avoid the congestion and record-high transit fees at the drought-affected Panama Canal. This shift in shipping patterns, emerging during the peak season for U.S. crop exports, is escalating costs and threatens to further erode the market share of U.S. corn and soy suppliers.

The Panama Canal, one of the world's critical maritime trade arteries, is experiencing significant snarls. Ships transporting crops face wait times extending up to three weeks, as container vessels and other regularly scheduled ships take precedence in securing the limited transit slots available. This bottleneck results from the severe drought limiting the water supply essential for operating the canal's lock system.

The impact of these restrictions is profound and likely to persist. Analysts predict that the situation could hinder grain shipments well into 2024, with hopes pinned on the region's wet season to replenish reservoirs and restore normal shipping operations by April or May.

Authority Actions: Limits on Vessel Transits

The Panama Canal Authority has been compelled to limit vessel transits this autumn. The daily transits have been reduced to only 22, a significant drop from the usual 35 in normal conditions. They are expected to decrease further to 18 by February. Grain ships, which typically seek transit slots just days before arrival, are disadvantaged compared to cruise and container ships that book months in advance.

The limited available slots are prioritized for the Canal Authority's top customers, which do not include bulk grain haulers. Any slots that do become available are auctioned off at high prices, often reaching $1 million or more, a cost too steep for the traditionally low-margin grain trading business.

As a result of these extended wait times, which escalated from around five to seven days in October to about 20 days by late November, more grain carriers are opting for alternative routes. These include sailing south around South America, Africa, or through the Suez Canal. However, these detours add up to two weeks to shipping times, incurring higher costs for fuel, crew salaries, and freight leases.

This logistical shift is reflected in the Baltic Dry Index (.BADI), a benchmark for bulk grain freight, which spiked to a 1-1/2 year peak on December 4, more than doubling from a month earlier. With grain prices off their 2020 highs, these increased freight costs will inevitably be passed on to grain and oilseed importers, affecting prices for human food and livestock feed.

Shifting Patterns: U.S. Corn Exports Take a Hit

According to a U.S. Department of Agriculture (USDA) report, the impact is already visible in shipping patterns. In the second half of October, only five U.S. Gulf grain vessels bound for East Asia passed through the Panama Canal, while 33 opted for the Suez Canal, a drastic shift from the previous year.

In response, some U.S. exporters are rerouting crop shipments to Asia from Pacific Northwest ports despite the higher costs associated with sourcing grain primarily via rail instead of the cheaper barge-delivered loads that supply Gulf Coast exporters.

This shift in shipping routes has had a noticeable impact on U.S. corn exports. Only 56.8% of all U.S. corn exports in October were shipped from Gulf Coast ports, down from 64.9% in October 2022 and 72.1% in October 2021, as per USDA weekly export inspection data.

Critical Decisions Ahead: Shaping the Future of U.S. Grain Competitiveness

The ongoing crisis at the Panama Canal serves as a stark reminder of the vulnerabilities in global supply chains, particularly when faced with environmental challenges such as droughts. This situation presents immediate logistical and financial difficulties for the U.S. grain industry. It underscores the need for adaptable and resilient shipping strategies in changing global circumstances.

Also read: ECLAC: This Will Be the Economic Growth of Latin America by 2023

As the industry adapts to these new realities, the decisions made by shippers, exporters, and policymakers will be crucial in determining the future competitiveness of U.S. grain in the global market. The situation is a complex interplay of environmental factors, logistical challenges, and market dynamics, with implications extending far beyond the United States' shores.

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