Supply

Panama Canal Authority Lowering Draft to 43 Feet

The Panama Canal Authority (ACP) announced that effective May 28, the maximum authorized draft for vessels transiting the canal’s Neopanamax locks will be 43 feet versus 50 feet, starting at the beginning of the year. ACP said the maximum authorized draft for ships transiting the Panamax locks also will be reduced to 38.5 feet on May 28 versus 39.5 feet. As shown below, Gatun Lake is a freshwater lake that provides the water required to raise ships in the locks that cross the Isthmus of Panama. The impact of the Panama Canal draft restriction to U.S. farmers is limited because of low ocean freights and lower U.S. exports.

The current authorized depth of the lower Mississippi River is 50 feet, but the funding to deepen the lower Mississippi River has not been allocated. The Army Corps’ goal is to maintain 45 feet on the lower Mississippi River and typically dredges to at least 47 feet to ensure the vessel does not hit bottom. When the lower Mississippi River is dredged to 50 feet, the Neopanamax locks that are also 50 feet will be extremely valuable.

The initial reasoning from grain merchants was that the new Panama Canal locks would enable vessels to be loaded to the lower Mississippi River depth of 45 feet versus 39.5 feet of the old Panamax Canal locks, or Panamax vessel loadings would increase from approximately 56,700 metric tons to 70,000 metric tons. When the new third set of locks opened, the sky-high ocean freight rates experienced during construction were replaced by historically low freight rates. With an ocean fleet that has excess capacity, the ability to save time turning a vessel faster became less important than saving fuel and reducing canal charges. To save cost per metric ton, a Panamax vessel would load to 70,000 metric tons and “slow steam” around the Cape of Good Hope to China. This situation is also true for container vessels. U.S. liquid natural gas exports over the same time period exploded higher, which has enabled the new locks to be successful.

The inland Mississippi River system plays a major role in transporting commodities, especially soybeans and corn. Approximately 60 percent of all grain and soybeans inspected are exported through the Center Gulf, which consists of the U.S. Customs Districts of New Orleans, Louisiana and Mobile, Alabama. The Panama Canal Authority 2018 annual report stated, “The grains category registered 27.4 million long tons, 29.5 percent of the total cargo, a decrease of 23 percent compared to fiscal year 2017. The fall was due to a decrease in the flows of soybeans, sorghum and corn from the United States ports located in the U.S. Gulf Coast  to Asia. Freight rates and fuel prices have increased, but not to the extent necessary to discourage the use of the Cape of Good Hope route for shipments destined to Asia. Furthermore, alternative sources of grains such as Brazil and Argentina have increased market share in China, impacting traffic through the Panama Canal. The end of the fiscal year was marked by the trade war between the United States and China, which has taken a toll on grain volumes through the Panama Canal.”  Water restrictions that lower the tonnage loaded and in turn, increase the cost per metric ton, will encourage more volume to go around the Cape of Good Hope.

Alan Barrett
Alan Barrett

Director of Consulting

Farm Journal

Alan Barrett is Doane’s project consultant and accomplished commodity economist with more than 25 years of experience in futures and cash markets with a focus on cotton, commodity projects, non-traditional agricultural products, transportation and supply chain studies. Alan spent six years as a commodity futures broker. His expertise encompasses feasibility studies of oilseed crushing plants (soybean canola, and cottonseed), grain elevators, export elevators, shuttle elevators, grain container operations, flourmills and other processing facilities. Alan also has conducted transportation supply chain studies for grains, oilseeds, fertilizer, coal, natural gas, crude oil, and petroleum products. Alan has considerable experience in non-traditional agricultural products such as coal, coke, natural gas, chemicals, hydraulic fracturing fluid, hydraulic fracturing proppants, glycerin, fertilizer, micronutrients, salt, limestone, cement, iron ore, pig iron, and steel, especially feed ingredients. Mr. Barrett has a BS and MS in Agricultural Economics from the University of Tennessee.