Droughts in Panama: imminent risk for grain trade.

Abstract

2.5% of global trade is dependent on the Panama Canal. It is a main artery for all types of goods, such as grains, shipped between the Pacific and Atlantic Oceans, effectively reducing freight journeys by close to 8,000 nautical miles each way. This is all put at risk by severe droughts affecting the Panama Canal Watershed, which has forced the administrators of the Canal to impose strict quotas on the number of ships passing daily. As a consequence of its business model, the trade of grain has been the most impacted, potentially creating catastrophic consequences for the industry. 

The Panama Canal 

The Panama Canal is a state-owned lock-type canal that connects the Atlantic and Pacific Oceans across 65 kilometers of Panama’s territory. The locks operate through a gravity-flow system where the necessary water is harvested from the Alajuela, Miraflores, and Gatún lakes, the latter of which is an artificial body of water created specifically for the Canal. This asset forever changed global trade since its inception in 1914, allowing ships traveling between the Atlantic and the Pacific to shorten their journey by nearly 8,000 nautical miles, or 28 travel days.

Its significance to the current world economy is further highlighted by its 2.5% share of global maritime trade, its 3.25% share of container cargo trade, and the 1,920 ports it connects across 170 countries. Additionally, the Canal oversees the transport of around 8% of the total global grain trade, one of the major commodities, amounting toaround USD 1,22 billion.

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Source: Panama Canal Authority

The droughts

The Panama Canal Watershed, or the systems of land, lakes, and rivers where the Canal’s main infrastructures reside, is one of the most valuable sources of fresh water in the world, supplying more than half of Panama’s population and the entirety of the Canal, as well as two major hydroelectric dams. This makes the country’s population, and one of the main drivers of global trade dependent on the correct management and protection of thenatural resource. Due to increased deforestation pressure, the mismanagement of croplands in surrounding areas, and overall climate effects, the Panama Canal Watershed has become more fragile than ever. 

The country has faced severe droughts throughout the year, thus causing the watersheds to drop to historically low levels. As a result, the Panama Canal administration is forced to impose strict quotas on the number of ships that can pass through, from an average of 36 ships per day down to an expected 18 ships per day in February, a 50% reduction.

The strain these quotas have caused upon global trade is seemingly greater on the grain industry. For manufactured goods, it is possible to reserve time slots to pass through the Canal months in advance, but the case is not the same for boats carrying perishable goods, which can only do so within a few days of their arrival at the entrance of the Canal. Therefore, since the Canal restrictions began, grains and other crops alike have been put at the end of the priority list, effectively causing a significant strain in the market. 

One of the main consequences of this has been seen in the routes that grain freights have had to take these past months. In the final weeks of October, only 5 grain-carrying, Asia-bound ships passed through the Panama Canal, while 33 of these ships sailed the long route through the Suez Canal. The re-route adds two weeks to the journey and hence adds two extra weeks of fuel, labor, and leases for the shipping companies to pay.

This spike in freight costs will likely be absorbed by importers, most notably the food and livestock feed industries, and thus will fall upon the everyday consumer.

In the last three months and since the announcement of the Canal quotas, the Baltic Dry Index, a widely accepted benchmark for bulk grain freight, has seen a significant spike in its prices, going from a low of USD 1,338 to peaking at USD 3,326, more than double the original figure. 

Source: investing.com

As time goes on and the Canal restrictions continue, prices will continue to rise, deterring demand for American grain in exchange for substitutes, such as rice or soy. It is not yet known when, or if, the watersheds will reach their full capacity again, thus forcing the affected industries to seek potential alternatives to the Canal, such as transporting the goods coast-to-coast by train in the case of US crops, but it still does not solve the issue of the loss of time and resources caused by the restrictions.

Conclusion

Overall, the strict quotas on the Panama Canal caused by the severe drought have had a global impact on the trade of commodities such as grains and will continue to strain the ability of firms to transport these goods with no clear end in sight. This situation highlights the threat that is climate change to the global economy. The mismanagement of natural resources such as the Panama Canal Watershed is generating a negative impact on global shipping capabilities, and unless significant change is made, will only continue down this dangerous road. 

Sources 

https://www.nasdaq.com/articles/panama-canal-drought-to-delay-grain-ships-well-into-2024

https://www.ft.com/content/b6604ad4-d2c9-4a00-8a50-1241fa86f26c

https://pancanal.com/wp-content/uploads/2022/10/Table06.pdf

https://www.elibrary.imf.org/configurable/content/journals$002f002$002f2023$002f129$002farticle-A002-en.xml?t:ac=journals%24002f002%24002f2023%24002f129%24002farticle-A002-en.xml

https://www.britannica.com/topic/Panama-Canal

https://www.investing.com/indices/baltic-dryhttps://www.thebusinessresearchcompany.com/report/grain-farming-global-market-report#:~:text=The%20global%20grain%20farming%20market%20size%20grew%20from%20%241%2C330.28%20billion,least%20in%20the%20short%20term

Gabriel Mateo

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