Global transit chokepoints threaten U.S. exports

SALT LAKE CITY — Two separate world events are creating global transit choke points for U.S. agricultural exports, increasing shipping costs and potentially impacting market prices and farm profitability.

While there are numerous trouble spots, American Farm Bureau Federation Economist Betty Resnick told producers attending AFBF’s Annual Convention and Trade Show that a persistent drought in South America is significantly reducing water levels for the Panama Canal, while terrorist activities related to the Israel-Gaza conflict are targeting Red Sea shipping.

Representing 14% of all U.S. maritime trade, 72% of all the cargo transiting the Panama Canal is either coming from or going to the United States, including a substantial portion of U.S. agricultural exports, according to Resnick.

“So, the Panama Canal is really a critical choke point for U.S. agriculture and U.S. economy in general,” Resnick said, with 18% of corn exports, 32% of soybean exports and over 90% of sorghum exports moving through the shipping canal.

Every ship going through the canal requires 52 million gallons of fresh water, primarily sourced through Gatun Lake, which is critical to the functioning of the Panama Canal.

“2023 was the second driest year in Panama Canal watershed history. Typically, their wet season is May through December, and so this time of year should be when the Gatun Lake is at its highest point,” Resnick said.

Even though the highest projected water levels are occurring now, it’s currently the ninth lowest year on record.

The lack of a normal rainy season has already slowed traffic, with transits down 33% compared to average, Resnick noted.

“Typically, you would have 36 ship transits a day,” she said. “Starting in July, the Panama Canal Authority started reducing the number of ships it was allowing through every day and it fell to 22 ships a day in December. In January, bumped that up to 24, but there’s not really a relief in sight for this until they get more rain.”

In addition to reducing the number of transits, PCA has also reduced the number of products being carried to reduce draft height of ships.

“So, not only are we sending less ships through, the ships we are sending through have less products on them,” Resnick said.

Maersk, the world’s largest container shipping company, has resorted to putting its containers on rail cars to cross Panama and putting them back on a ship.

“That’s not an option for dry bulk or liquefied natural gas, or LNG, which are some of the most affected products by this reduction in transit and this is indicative as to what this means,” Resnick said.

While there are alternative routes, shipping time and costs increase dramatically, according to Resnick, noting it currently takes 32 days to move bulk commodities from the Port of New Orleans to Tokyo.

“If you’re going through the Red Sea as an alternate route, it takes an additional 18 days or 50 days total. If you can’t go through the Red Sea, which is facing its own issues right now, you have to go to the Cape of Good Hope route, which takes 54 days adding over three weeks as compared the Panama Canal,” she said. “So, the Panama Canal is extremely important.”

Bookends

According to an October 2023 U.S. Department of Agriculture report, 83% of all vessels headed from the U.S. Gulf to East Asia were going through the Panama Canal in 2022, accounting for 80% of all U.S. grain shipments.

By 2023, due to restrictions through the Panama Canal, 87% of U.S. vessels going to East Asia were sent going through to the Suez Canal and the Red Sea as an alternative, accounting for 91% of U.S. grain shipped.

According to Resnick, the Red Sea is bookended by two chokepoints — the Suez Canal to the north and the Bab el-Mandeb Straits to the south connecting the Red Sea to the Indian Ocean.

The Suez Canal gained international fame in March 2021 when the container ship Ever Given ran aground and became wedged between the banks of the canal, effectively blocking passage and costing an estimated $60 billion in global trade over the six-day period.

Since November, the Bab el-Mandeb Straits have increasingly become a focal point for Houthi terrorists attacking international shipments they believe are destined for Israel in retaliation for the ongoing Israel-Gaza conflict, with more than 24 ships attacked thus far, Resnick said.

“The Red Sea is very important globally,” she said. “It represents 15% of global maritime trade, 8% of global grain trade, 12% of maritime oil trade and 8% of liquefied natural gas.”

Even though the United States and 20 other countries announced “Operation Prosperity Guardian” in an attempt to make sure the Red Sea is safe for trade in December, the frequency of attacks continues to increase, pushing shipping cost higher.

“We’re definitely seeing higher shipping cost — global container costs have gone up 130% in the last month,” Resnick said.

“So far, it has not impacted the price of oil, but it has the opportunity to increase inputs. Typically, the Red Sea is really a minor route for U.S. agricultural products, but because of issues in the Panama Canal again, we’re seeing a much stronger impact.”