MORE than $225 million annually could be saved in transportation costs when shipping grain from the U.S. to Asia after the Panama Canal expansion is completed, according to a Rabobank report released Dec. 11, "Panama Canal: Expanding the Gateway for U.S. Grain to the East."
An estimated 900 million bu. of grain are shipped from the U.S. to Asia each year. Rabobank projected that expansion of the canal will reduce shipping costs of corn and soybeans from approximately $2.00 to $1.75/bu. — a significant savings that could create a competitive advantage for U.S. grain in the global marketplace.
"The Panama Canal expansion is great news for American competitiveness," said Will Sawyer, analyst with Rabobank's Food & Agribusiness Research & 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 (PNW) 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-a-vis Brazil, Argentina and other grain exporting countries in Eastern Europe."
Until recently, the U.S. Gulf-Panama Canal trade route has been the dominant avenue for U.S. grain exports. Nevertheless, demand growth in the Asian market and the increased efficiency of the PNW has reduced the Gulf's market share by 10% over the past decade.
Currently, the cost of shipping grain through the canal is equivalent to shipping through the PNW. Therefore, the majority of the grain produced in the northern and western Corn Belt is routed to Japan through Washington and Oregon.
For a reference point, Rabobank estimated that shipping grain from Minnesota to Japan by way of the Panama Canal will cost 12%, or 25 cents/bu., less than shipping it through the PNW presently (Figure).
"The expansion is also positive for U.S. Gulf ports 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," Sawyer continued. "Most of this shift will be driven by increased corn exports through the U.S. Gulf, reversing the recent trend."
A decline in the transportation cost of grain and increased capacity will give the Panama Canal a cost advantage over the PNW and also will improve cost competitiveness for U.S. grain at a crucial time as the U.S. Department of Agriculture predicts that corn exports will climb 4.5% per year.
Rabobank projects that exports leaving the Gulf could nearly double from the 2011-12 crop year, increasing 6% per year. Rabobank sees little risk that U.S. Gulf exports will reach capacity constraints. Even with the upsurge of grain exports for the 2013-14 crop, the Gulf ports will be at only 65-70% capacity, which leaves ample room for growth.