Panama Canal Expansion Will Goose Cotton Exports

July 9, 2014 01:09 AM
Panama Canal Expansion Will Goose Cotton Exports

But exports of other ag products might not be affected.

Cotton exports may grow by 238,000 bales, or 2%, due to a $5.25 billion expansion of the Panama Canal set to be complete by April 2015.

That’s according to a paper delivered last month by Flynn Adcock, an agricultural economist at Texas A&M at the Agriculture Transportation Coalition. Adcock’s analysis, first conducted in 2011 then revisited this year, showed a minimal impact on exports and production of other U.S. crops.

Much of the cotton destined for export – even cotton produced east of the Mississippi -- is shipped by train in containers to the West Coast. "Even though the ports in Long Beach and Los Angeles are far away from the production centers, it still makes more economic sense to ship it that way," says Adcock.

Deepening the Panama Canal to accommodate much bigger ships – so-called Post-Panamax vessels that can carry up to 13,000 TEUs (twenty-foot equivalent units) – will change all that. Most cotton exports from the East Coast are shipped on Panamax vessels that can carry only 5,000 TEUs.

Shipping on Post-Panamax vessels is much cheaper than Panamax vessels--$1449 per TEU versus $2314 per TEU, according to Adcock’s analysis.

Adcock estimates that transit time to China from the East Coast through the Panama Canal will be 7 to 8 days longer than the intermodal route. But once the Canal can accommodate Post-Panamax ships, all-water shipping from the East Coast will be much cheaper, $490 per TEU cheaper, than the intermodal option.

Unfortunately for eastern cotton producers, recent toll increases will capture one-third of the potential savings from expansion, by Adcock’s estimation. "In the end, the expansion will reduce maritime costs for shipments from the Gulf and South Atlantic ports to China by $140 TEU, a 28 percent reduction."

Adcock acknowledged in his presentation that the reduction in costs is theoretical. Some improvements in East Coast ports will need to be made to accommodate these much bigger ships, including raising the Bayonne Bridge to 215 feet from 151. The bridge connects Staten Island to New Jersey.

Post-panamax ships are so big that they typically visit several ports on a trip before leaving for the Far East. Until those logistics are worked out, the benefits to U.S. cotton producers may be half of Adcock’s original estimation.

Adcock’s analysis shows the United States would gain in cotton exports mostly at the expense of India and Brazil. Most other cotton-producing countries would experience a modest gain in business.

Even so, the deepening of the canal will redistribute wealth among the states as well, increasing cotton exports from Atlantic and U.S. Gulf ports at the expense of Pacific Coast ports, which would experience a reduction. "But there may be a competitive reaction from LA/Long Beach," says Adcock.

Historically, the top three destinations for cotton exports are China, Turkey, and Mexico. The top three ports of cotton export are Long Beach/Los Angeles, Savannah and Houston. Exports from Savannah are growing, with much of the cotton going to Asia.

A 28 percent reduction in costs, according to Adcock’s estimates, would double exports from Savannah and New Orleans and result in a 57% increase in exports from Houston. These gains would come at the expense of exports from Los Angeles and Long Beach, which would see their traffic drop by 70%. Warehouses that hold the cotton prior to export will capture some of the rate reduction.

Adcock’s analysis shows the switch would produce $300 million in revenue gains for cotton producing states, including $86 million for Texas alone, and small revenue losses for California and Arizona.

While in-depth analysis was conducted only for cotton exports, a review of export flows for other crops show that the modernization of the canal may have a marginal impact on the export of some of these other crops. California ports, for instance, account for only 4% of soybean exports—most soybeans leave the country through Louisiana, Virginia, and Washington.

"Some of that could be redirected. Soybeans have to come a great distances, since there’s minimal production west of the Great Plains."

Similarly, most corn exports are shipped to Asia through Louisiana and Washington, with California accounting for only 6% of corn exports. The outcome is likely to be the same as the one for soybeans—minimal change.

Adcock doesn’t expect a measurable impact on rice, meats, fruits and vegetables. West coast ports will continue to be the preferred exit points. "Production centers are nearby," he says. And because many of the items are perishable, "lower transit times are extremely crucial."


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