Shippers normally opt for the expense of air service only when they need to expedite high-value cargo such as computer chips and diamonds. So when a paper and pulp mill in northern Maine recently resorted to air freight an order to a customer in India, it not only was highly unusual, but also indicative of the extreme logistics challenges shippers in isolated regions face.
In the mill’s case, it couldn’t get ocean connections enabling it to fill the order in time. “They chartered a plane to get the pulp to India, because it would cost more to shut down one of the machines in their billion-dollar paper mill, lay off workers and have that production hiccup,” said Patrick Arnold, director of operations for the Maine Port Authority.
The state agency has its hands full trying to help Maine-based industries such as White Rock Distillers, L.L. Bean and metals recycler Schnitzer Steel find ways to get their products to overseas markets because the state’s ports are off the beaten container path.
Bulk and breakbulk vessels call regularly at the Maine ports of Portland, Searsport and Eastport, but the only regular container service, American Feeder Lines, is going out of business.
“There are piles of bulk commodities like pulp and scrap metal that should or could move by container, but until they have heavy-load opportunities where the margins are just right to export out of a port, it doesn’t unlock the market access for them to be containerized,” Arnold said.
The problem isn’t unique to Maine. Many U.S. exporters, especially agricultural producers in areas with poor rail, truck or port connections, can’t take advantage of the benefits containerization offers. In some rural areas, agricultural products can’t be containerized because it’s too expensive to reposition empty boxes from the urban areas to which loaded import containers flow. The vast majority of U.S. export products are relatively low-value, price-sensitive commodities, so it’s important that transportation not cut into profit margins.
The lack of suitable export infrastructure and transportation to get containerized products to export ports is a barrier for President Obama’s goal under the National Export Initiative to double the value of U.S. exports in the five years to 2015. The NEI otherwise has gotten off to a healthy start since its 2010 launch. U.S. exports increased almost 16 percent last year to $2.1 trillion, after increasing 21.3 percent in 2010.
Containerized exports, however, grew only 6 percent year-over-year in 2011 to 11.9 million 20-foot equivalent units, because of sagging demand in European and Mediterranean markets. That trend will continue this year, according to JOC Economist Mario Moreno.
In emerging markets, growing demand for U.S. agricultural exports, which account for about a quarter of the value of all U.S. exports, could offset the slowdown in Europe. That’s especially true in large countries such as China and India, where burgeoning middle classes are upgrading their consumption of protein-rich meats fed by imported grains. But high transportation costs are eating into U.S. producers’ competitive position.
“Countries like Brazil and Argentina, which are aggressively growing agricultural exports similar to the ones we export, are handling their cargoes a lot less,” said Walter Kemmsies, chief economist at port design and engineering consultant Moffatt & Nichol. “They have lots of land, so they are able to have big, mechanized farms like we do, but they load their crops onto trucks, which deliver them right to the ports, where they are loaded right onto the ships, so they are only handling the cargo twice.”
By contrast, crops produced at large U.S. farms in the upper Midwest, which historically focused on getting products to the large U.S. domestic market, move first through the domestic transport network and are then transloaded for shipment to ports for export. “We tend to handle the cargo almost twice as much as places like Brazil do,” Kemmsies said.
Although the sea route from Brazil to China is much longer than that from the U.S. to China, Brazil is gaining market share from the U.S. for its grains and oilseed exports. “Part of the reason is that Brazil has better quality control. They only allow 1 percent foreign matter in their exports, whereas we allow 2 percent,” Kemmsies said. “The other piece has got to be the handling cost.”
Kemmsies believes U.S. agricultural exports could become the fuel for the next economic growth cycle, not because they’re labor intensive, but because of the jobs and economic return that will be created in sectors that support the export supply chain, including grain brokers, grain elevators, railroads, trucking, transload centers and ports.
With federal investment in transportation infrastructure hamstrung by budget deficits and congressional gridlock, private investment offers some hope as a source of funding needed to pave the export path. Private investors, however, must see a clear return on their investment and a way through government regulation, which can slow, or even kill, a project.
“The shifting global landscape is creating opportunities particularly around raw commodities for investment in ports and the effects that has on producers and railroads,” said Manny Hontoria, a partner with Oliver Wyman, a management consulting firm and subsidiary of Marsh & McLennan. “Much of the recovery in the U.S. economy has been export-led, especially when you look at the imbalances in challenging trade lanes like the trans-Pacific and trans-Atlantic. I’m not saying the imbalances have been reversed, but they are moving in the right direction.”
Hontoria said there is a need for public and private sectors to work together to open the supply chain for exports to more private sector involvement. “These are businesses that should attract the capital necessary if we can allocate the risks appropriately and align the incentives in the right way,” he said. “For bankable projects, there is a ton of interest waiting to come in.”
Such projects don’t need to be government-subsidized. “We just need to find a way of making them work,” Hontoria said. But he warned that government regulation could derail private investment if it slows the process. “There is a lot of deal fatigue in the system,” he said. “It’s better if it’s faster, but it’s OK as long as it’s moving forward and there’s some predictability that a deal is going to be executed.”
Investment in railroad and highways isn’t the problem, so much as getting funding for the so-called first mile to the farm, and the last mile to the marine terminal, said Robert Robideaux, senior vice president of Marsh Risk and Insurance Services. The challenge is making the distinction between a private investment and one that requires a tremendous amount of government facilitation.
“Putting short rail through cornfields in the Middle West is not nearly as much of a challenge as bringing that last additional mile into some of our deep-water ports,” Robideaux said.
The issue with the last mile is who will pay for it. “The first-mile-last-mile discussion looks more like a P3 (public-private partnership) discussion than a private discussion,” he said.
Private investors are stepping up to the plate to set up transloading facilities that load grain shipped in bulk from the Midwest into containers for export. BNSF Railway, for example, built a grain transloading facility near Chicago, and Union Pacific Railroad is completing a similar facility in Yerma, Calif. Other private investors have built transloading facilities around Norfolk, New York and Savannah, and more are expected.
But the main route for grain exports from the Midwest, the U.S. inland waterway system, is suffering from a lack of public sector investment. There’s no lack of finance: The public waterway system is funded by the Harbor Maintenance Tax and the Harbor Maintenance Trust Fund, which is expected to have a surplus of nearly $7 billion by the end of fiscal 2013, according to the Association of American Port Authorities.
The problem is Congress isn’t allocating funds to maintain and repair deteriorating locks and dams on the Ohio River, which barges use to transport grain and coal down the Mississippi to New Orleans for export.
“It hasn’t been invested in a lot for the last 10 to 20 years,” Kemmsies said. “New Orleans used to have 60 percent of U.S. grain and oilseed exports, and this has dropped to 45 to 50 percent because of the problems with the inland waterway.”
Kemmsies said private investment can help pave the road to more exports if it’s funneled into grain elevators dedicated to exports. The problem is that all grain goes into grain elevators and storage for the U.S. market. If the grain is slated for export, it must be transferred to export elevators and storage, and from there to the ports, creating extra handling and extra costs. “The investment in infrastructure,” Kemmsies said, “reduces the amount of handling.”