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How US grain exporters worked their way around two blocked canals

More US corn bound for Japan and South Korea loading in Pacific Northwest

Dry bulk supply chains are proving highly resilient. US grain exports have been simultaneously repelled from the Panama and Suez canals, yet rates have not spiked and cargo volumes have not diminished

THE past few months have been unprecedented for US agribulk exporters, with a drought blocking bulkers from the Panama Canal and Houthi attacks in the Red Sea pushing those same ships away from the Suez Canal.

“It is back to the way it was in the early 1800s, before we had either canal, when everybody had to take the long way around both continents,” said Jay O’Neil, head of HJ O’Neil Commodity Consulting, in an interview with Lloyd’s List on Monday.

The US wasn’t exporting millions of tonnes of soyabeans, corn and wheat around the Cape of Good Hope to Asia in the early 1800s — it was exporting a few thousand tonnes of slave-picked cotton across the Atlantic to the UK. Today’s agricultural supply chain situation is truly unique.

“People are making it work. The market is getting along pretty well — surprisingly so,” said O’Neil. “Buyers have adjusted their logistics to what you might call the ‘new normal’, which I hope is temporary.”

Grain cargoes aboard panamaxes and supramaxes that used to transit the Panama Canal to Asia are taking much longer to reach their destinations via the Cape of Good Hope, yet this has not reduced total US exports, nor has it led to a spike in grain freight rates.

Some shifting between coasts

There has been some shift in volume from the US Gulf to the Pacific Northwest (PNW) this year, but the changes are highly concentrated, not broad-based.

The US Department of Agriculture compiles weekly data on bulk exports by region of loading, measured in tonnes of cargo inspected.

Bulk agricultural exports were up 7% year on year through April 11, according to this data. The US Gulf accounted for 51% of volume year to date, the PNW 28%, and other regions 21%. During the same period in 2023, the mix was 57% US Gulf, 23% PNW, 20% other regions.

US Gulf grain export volumes were down 1.1m tonnes or 5% year on year through April 11, with PNW volumes up 3m tonnes or 37%.

 

 

The coastal swing was almost entirely driven by a single trade: US corn exports to Japan and South Korea. These volumes rose 3.4m tonnes or 521% year on year from the PNW, and fell 840,028 tonnes or 41% from the US Gulf.

“I had expected a much more substantial shift from the US Gulf to PNW for cargoes going to China, but we haven’t seen that,” said O’Neil.

Despite shorter transit times and lower freight rates out of the PNW, “the lion’s share of US grain is going out of the US Gulf to Asia”, he said, citing two reasons why export flows have not changed more.

First, there is limited PNW capacity. “You can’t ship everything from the PNW.” Second, US export companies are, in practice, not fully flexible.

Grain exporters traditionally balance cargoes between various loading regions based on destinations and grain qualities. “So, they will continue to ship out of the US Gulf even when it appears less attractive than going out of the PNW.”

Grain transport rates have not spiked

O’Neil noted that grain loaded in the US Gulf will take around 38 days to reach China via the Panama Canal, 52 days via the Suez Canal and 56 days via the Cape of Good Hope. Thus, the effective transit time has increased by 18 days or 47%.

Dry bulk spot rates have risen due to routing diversions, but haven’t spiked as they have in container shipping.

US Gulf-to-Japan rates averaged $58.95 per tonne of grain cargo in February, up 21% year on year, according to the USDA. PNW-to-Japan rates averaged $31.50 per tonne in February, up 16% year on year.

“Why haven’t rates really popped despite the problems at the canals? I would attribute most of the reason to the China business not being robust enough. China, economically, has still not recovered from the pandemic,” said O’Neil.

That said, the canal situation has had an extreme rate effect on one particular trade: US Gulf to West Coast South America. Rates doubled, from $30-$32 per tonne prior to the Panama drought to $59 per tonne currently. Transit times quadrupled from nine to 10 days via the Panama Canal to 42-43 days via the Strait of Magellan.

“Those poor guys in the West Coast South America trade really took it in the face,” said O’Neil.

Expectations are positive for the second half of this year as water levels in Panama are predicted to rise.

“The expectation is that the rainy season will come, and will be normal, and will help recharge the reservoirs. But we’re not there yet. The rainy season in Panama doesn’t start until May and doesn’t really kick in until June. And we all know it’s impossible to predict the weather.”

According to data from the Panama Canal Authority, 66 bulkers transited the panamax locks in March, up 22% from the low point in February but still 60% below transits in October 2023, the month prior to transit slot restrictions.

“We are seeing some grain vessels start to sneak through the Panama Canal again,” said O’Neil. “But it’s just here and there, not wholesale.”

Demand headwinds in the years ahead

O’Neil is hopeful canal issues will be temporary. He is markedly less optimistic on demand for US grain exports in the years ahead.

“US wheat exports have declined because of the Black Sea. The US will continue to lose market share to the Black Sea, Australia, and other markets. The world doesn’t need US wheat as much as it used to, so exports are going to suffer,” he predicted.

“The newer phenomenon is what’s happening with corn and soyabeans. Brazil continues to expand, and with that expansion, together with political and trade issues, the US is losing market share.

“With soyabeans, there is also a new expansion of US soya crush capacity, so we are going to use more soyabeans domestically year by year, which translates into declining export volumes.”

Meanwhile, corn exports continue to be weighed by domestic consumption for ethanol production. There is now a push to use ethanol for production of sustainable aviation fuel. The use of ethanol for SAF “would mean we’d consume more corn domestically, a negative effect for exports”.

Add it all up, said O’Neil, “and I would not be excited about owning a US grain export elevator anytime in the next five to 10 years”.

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