State of Wisconsin/ CFIRE /Department of Transportation RESEARCH PROGRESS REPORT FOR THE QUARTER ENDING: December 31, 2009

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1 State of Wisconsin/ CFIRE /Department of Transportation RESEARCH PROGRESS REPORT FOR THE QUARTER ENDING: December 31, 2009 Program: SPR-0010(36) FFY99 Part: II Research and Development Project Title: Understanding the Economic, Environmental and Energy Project ID: CFIRE Consequences of the Panama Canal Expansion on Midwest Grain and Agricultural Exports Administrative Contact: Greg Waidley Sponsor: CFIRE WisDOT Technical Contact: Approved Starting Date: 10/1/2009 Approved by COR/Steering Committee: $80,000 Approved Ending Date: 1/31/2011 Project Investigator (agency & contact): Jason Bittner, UW-Madison Description: Total study budget Expenditures for current Total Expenditures to Percent Complete quarter date $80,000 $30, $30, % Progress This Quarter: (Includes project committee mtgs, work plan status, contract status, significant progress, etc.) The research team nearly completed a literature review pertaining to the use and expansion of the Panama Canal, including reports of the principal trade associations related to the grain industry and the US Department of Agriculture. A draft lit review is pended to this report. The intent of the review was to understand changing business practices and economic forces affecting the trucking, rail, shipping, and logistics industries with relation to the pending changes in the Panama Canal operations. The review focused on how the changes will affect and be affected by practices related to grain and agricultural exports. The research team also assembled the currently available data on US exports, including the use of state by state data on grain and other agricultural exports. The research team also has begun to identify the principal consumers of US grain exports and identify preliminary grain import outlooks for various countries and regions. The research team conducted preliminary analysis of the FAF and Transsearch data sets available to characterize shipments of grains and ag products. The research team contacted several major East Coast seaports to assess capacity of both grain terminals and container operations. Work Next Quarter:

2 Establish project oversight committee. The research team will meet with the project committee to finalize and synthesize the initial list of impacts for further explanations. Conduct interviews with Wisconsin and Midwest Corn and Soybean associations in advance of the expected survey in Task 3. Bittner will attend the Shifting International Trade Routes Examining the Impact of the panama Canal Expansion conference on January sponsored by the American Association of Port Authorities. During the next quarter, research team members will meet with representatives of the Panama Canal Authority and tour canal operations. The research team will also conduct interviews with the parallel Panama Canal railway and explore its plans for transshipment following the opening of the canal. The research team will continue its review of Data from FAF, Trans-search, and National Agricultural Statistics Service information. The team will prepare a Survey for various Associations & Producers. Research team members will also attend associated sessions at the TRB Annual Meeting in Washington DC. Circumstances affecting progress/budget: None. Project started officially on October 1 st. Additional Information: The following maps have been prepared to depict the principal trade routes for the midwest s ag and grain exports:

3 Gantt Chart: Task/Month Oc t No v De c Ja n Feb Ma r Apr Ma y Ju n Jul Au g Sep Oc t No v De c 1. Literature review and data collection 2. Review Data from FAF, Trans-search, and NASS 3. Survey and Interview with Associations & Producers 4. Characterize emissions across transport routes 5. Detail energy consumption 6. Provide economic assessments for future export volumes 7. Develop recommendations, project papers, & final report Quarterly Reports X X X X X

4 There are 3 primary sources of information regarding the Panama Canal expansion and its effect on US grain trade. These are: Various US grain associations The Panama Canal Authority USDA, The Army Corps of Engineers and other federal reports Few publications, mostly from the grain associations, address the Panama Canal with respect to grain exclusively. In the other cases, projections and assumptions are made for canal traffic or grain trade in general from which we can only draw inferences. US Grain Associations Given the potential impact the Canal expansion might have on export activity, it is surprising that so little is said by grain trade groups. The US Grains Council has dedicated the most attention to the issue. By some accounts, direct benefits to grain trade are expected to be fairly modest. A story in a 2006 USGC Global Update newsletter, released soon after Panamanians voted in favor of the expansion, relates the following from industry consultant Jay O Neil: Panamax bulk carrier vessels are still the largest size vessels that most destination grain ports can handle... The grain industry really hasn t had a problem with the canal s vessel size capabilities in the past, just its transit delays. This expansion project should reduce wait times at the canal. 1 On the other hand, some see accommodation of post Panamax vessels as a catalyst for the growth of containerized grain. A USGC Grain News publication released in 2007 (over a year after the previous quote) explains: Phil Thornton, value enhanced projects director for the Illinois Corn Marketing Board, said as of mid November, shipping via containers to Southeast Asia cost about $22 per metric ton less than bulk although that differential can vary depending on current markets. Thornton said containerized shipping of grain and related products continues expanding after gaining in popularity over the last decade. "This sector will change dramatically again once the Panama Canal expansion is completed in 2014," he said. "That will allow larger container ships to move through the canal to the Mississippi Gulf. We could see significant increases in containers moving up and down the Mississippi River via barges at that time." 2 Several other USGC articles make mention of the expansion, but beyond these publications there is very little commentary on the potential impacts. There is considerably more thought given to overall trade patterns and areas of growth. 1 Quoted in USGC Global Update, 10/27/06 p 1 2 Quoted in USGC Grain News, 12/07 p 6

5 In August of 2009, Adel Yusupov, director of USGC s market development programs in Southeast Asia, wrote that demand for meat in Southeast Asia has grown substantially. This in turn has prompted tremendous growth in demand for feed, even during the recent economic downturn. Mr. Yusupov concludes, I see continuing growth in Southeast Asia s livestock production and feed demand amid commercialization of livestock farms and integration of feedmilling and trading companies 3. He echoes many of the same sentiments in a contemporary report about a new containerized shipping service to Vietnam 4. Likewise, in the 2007 Corn Refiner s Association Annual Report entitled Corn: Part of a Global Economy, industry analyst Sakharam K. Patil writes: In [Asia, Eastern Europe and South America], food as well as industrial products will be important growth markets for refined corn products. Asia will be the largest growth area due to its sheer population size. 5 The Panama Canal Authority (ACP) ACP has produced several documents relating to the expansion, most important of which is the expansion proposal itself. In it, ACP identifies dry bulk (including grains) as an important market segment for the Canal. Until the rise of container shipping, in fact, dry bulk was the top revenue generator for the Canal 6. ACP estimates that completion of the expansion will probably lead to an annual increase of 5.6% in containerized tonnage transiting the canal whereas dry bulk is expected to increase by only 1% during the same period. Under the no expansion scenario, ACP estimates that the canal will reach maximum operating capacity sometime between 2009 and If the canal were left to operate at capacity without expansion, growth in grain shipping (especially containerized grain) would likely have to be diverted to other routes, particularly the Canal s chief competitor for the US East Coast to Asia route: the US intermodal system. Based on the same analysis under the expansion scenario, the Canal market share in the Northeast Asia, US East Coast route (an important one for grain) rises to 49% 8. Federal Reports Several different federal agencies have their eye on the Canal expansion. The US Army Corps of Engineers is responsible for regulating and reporting on the nation s various water based ports. In a 3 Southeast Asia s Feed and Grains Market newsletter thingy 4 New Shipping Route blurb 5 A Global Outlook for Refined Corn Products. Corn, Part of a Global Economy: Corn Refiners Association Annual Report 2007 p 11 6 Canal proposal p 17 7 Canal proposal p 38 8 Canal proposal p 40

6 2007 Upper Mississippi River System report, the Corps re evaluates current plans for the region and, in part, addresses the potential effects of canal expansion. Most notably, Corps analysts assume a $1/ton decrease in overall shipping costs for Midwest grain to Pacific ports. In addition, Canal expansion is a key factor in its High Traffic scenario 9. The report also states: The expansion, expected to be completed before 2020, will reduce ocean freight costs and as a result likely draw more freight in and out of the country through the Gulf, including a substantial increase in containerized traffic. Distribution of containerized freight will require some level of barge utilization both upbound to markets and downbound either as empties or filled with goods destined for foreign markets. In addition, the all water routings through the Gulf ports and up the Mississippi River with their inherently lower cost should be favorably competitive with routings through the U.S./Mexican/Canadian coastal ports that require a lengthy rail segment to reach interior markets. 10 The report continues by predicting that this will place greater strain on rail and highway networks around Gulf ports, further pushing lower value commodities (such as grain) into water based alternatives 11. On the other hand, the report counters that the future for both the grain and shipping markets are filled with uncertainty. Factors such as domestic corn ethanol production, soy production in South America, and changes in the US rail system taint any long term analysis with a large measure of uncertainty. The USDA also considers shipping as it relates to the movement of agricultural products. A feature article from a USDA Grain Transportation Report from 2008 headlined Grain Is the Principal U.S. Commodity Transiting the Panama Canal hints at increased competition between Canal and US intermodal travel: The reduction in the amount of grain passing through the canal en route to Asia may be connected to the high ocean rates and spreads witnessed throughout the year. Because of these higher rates, more grains were shipped through the Pacific Northwest ports to Asia, especially wheat and soybeans. The impact of 9 USACE report p 50 of the pdf file 10 USACE report p 91 of the pdf file 11 USDA report p 91 92: Some of the additional freight will likely move through Gulf ports onto barge, but most of the higher valued freight will more likely move by train and truck. This will exacerbate constraints on rail and increase the likelihood that more traffic will move to water than predicted through traditional analysis, mostly bulk commodities and lower valued products, but also more containers. As congestion grows on the railroads due to growth of container traffic, they may be willing to focus on this more profitable side of their business and allow their bulk trade to divert to waterways. Recent studies have shown that this is already occurring to an extent (Water Compelled Rates and Available Navigation in the Upper Mississippi River Illinois River Basins: An Update, February 2007, Tennessee Valley Authority). The waterway will be in much better position to attract this traffic, traffic for which it is more suited, if investments are made to improve the system s reliability and efficiency. As a result waterways will assist in reducing congestion levels on the Nation s railroads and highways.

7 higher ocean spreads is more pronounced in the Gulf since a larger proportion of shipments out of East Coast to Asia originate from the Gulf ports. 12 The Congressional Research Service produced a report on Louisiana ports in the wake of Hurricane Katrina that highlights the importance of Gulf ports in the exporting of grain. In it, CRS establishes the importance of Louisiana ports worldwide (among the busiest in the world) and cites earlier statements by the North American Export Grain Association that these three ports serve as a gateway for nearly percent of all U.S. exported corn, soy, and wheat 13. Conclusion It must be acknowledged that there is little information available regarding market expectations once the expansion is completed. This is in part due to gross uncertainties in grain markets in general. As with any predictive analysis, it is difficult to anticipate grain trade patterns ten years into the future. This, coupled with the potential for change in the US intermodal system and general worldwide shipping, make the picture very fuzzy at best. The consensus appears to be that traditional dry bulk grain shipping will not be substantially impacted by the Canal expansion, other than through decreased transit times. On the other hand, containerization of grain will likely enjoy accelerated expansion as a result of the opening of the Canal to larger container ships. The Canal expansion is expected to alleviate congestion, making the Canal route more attractive particularly for routes to and from the US East and Gulf coasts. This dynamic also applies to the US grain export market. 12 USDA Grain Transportation Report, 2/21/08 13 Congressional research p 3