Midwest grain and soybean exporters who ship by barge down the inland waterways system will gain an advantage over global competitors at the end of 2015. That’s when the Panama Canal’s big new locks open to commercial traffic, allowing larger ships to carry more product from the U.S. Gulf to fast-growing markets in Asia at lower cost.
To cite one example, exporters will be able to load an extra 500,000 bushels of soybeans on a bulk ship with 45 feet of draft that can transit the larger locks. That will boost the value of that shipload of soybeans by $6 million to $7 million per vessel compared to a ship limited to 39 feet of draft, the canal’s current depth.
But — and it’s a significant but — the cost advantage the larger Panama locks can offer to agricultural exporters in the Midwest depends on the reliability of the inland waterways, which now carry more than 60 percent of U.S. farm exports to facilities on the lower Mississippi River, where they are loaded on oceangoing bulk ships. The inland waterways system also carries about 20 percent of the nation’s coal and 22 percent of U.S. petroleum.
About half of the 238 locks on the system are more than 50 years old, and a third is 75 years old, well beyond their useful life. Because the Army Corps of Engineers doesn’t have reliable funding for lock maintenance, they are unreliable, causing critical delays for agricultural shippers that can erode the cost advantage of waterborne transport.
“Having locks that work is critical,” said Rick Calhoun, president of Cargo Carriers, Cargill’s barge division. He said it was taking barges 60 hours this month just to get through Lock 52 on the Ohio River because of the lack of adequate maintenance and repairs. “It’s creating a real log-jam in the system, and that creates uncertainty in the business, which drives cost higher,” he said. Cargo Carriers operates about 1,300 barges.
Because they export about half their harvest and depend on exports to make a profit, soybean farmers in Iowa, Illinois and Indiana are especially vulnerable to lock breakdowns. “If you have a failure of significant duration during harvest season, the result is that the cost associated with that gets passed on to farmers,” said Mike Steenhoek, executive director of the Soy Transportation Coalition, which is made up of soybean farm associations in 12 Midwest states.
If a grain or soy export loading facility can’t ship out by barge, it’s going to tell farmers not to deliver to the facility. “What that will do is drop the price per bushel of soybeans. Farmers will ultimately pay for that,” he said.
The inland waterways system of the Ohio and Mississippi rivers gives the U.S. a tremendous advantage over such competitors as Brazil, Argentina and Ukraine because it provides low-cost waterborne transportation to some of the richest farmland in the world. Brazil is the world’s second-largest producer of soybeans after the U.S. — and its biggest competitor.
|Soybean Transportation Costs|
|Costs of transporting soybeans, U.S. vs. Brazil. Price per metric ton in the third quarter of 2012.|
|Davenport to Shanghai||Sioux Falls to Shanghai||N. Mato Grosso to Shanghai|
|Source: U.S. Department of Agriculture|
The Soy Transportation Coalition estimated that the total cost of transporting soybeans from Davenport, Iowa, to Shanghai by barge down the Mississippi and onto a bulk ship in New Orleans Port District in the third quarter of 2012 was $85.19 per metric ton, while the transportation cost from Sioux Falls to Shanghai by rail to the Pacific Northwest onto a bulk ship to Shanghai was $93.05. The transportation costs of both routes from the U.S. to Shanghai were significantly cheaper than the $141.73 per metric ton cost of shipping from Brazil’s Matto Grosso by truck and bulker to Shanghai.
The lock outages on the U.S. inland waterways have been getting worse, jeopardizing the cost advantage of that route. “The barging system on the Mississippi is not working,” said Walter Kemmsies, chief economist of engineering firm Moffatt & Nichol. There was an eightfold increase in the length of lock outages on the waterways system as they rose from 20,000 hours in 1992 to 160,000 in 2012.
While the locks have been deteriorating, BNSF Railway and Union Pacific Railroad have invested huge amounts of money in rail lines that are luring cargoes away from the waterways system. The railroads are hauling increased shipments from the Midwest to the West Coast for export.
“They put in steel routes to replace the water routes,” Kemmsies said. The railroads are charging rates far higher than barge companies. “The worse the Mississippi gets, the higher the rail rates from the Middle West to the West Coast,” Kemmsies said. “Our waterways system helped us build a strong national economy, but we sit here like a bunch of fools throwing out this national treasure.”
One clear result of the deterioration of the locks and the resulting shift to rail transport is that the New Orleans Port District, which consists of barge-handling facilities from Baton Rouge to the mouth of the Mississippi, has lost 14 percent of its market share of U.S. grain and oilseed exports over the last 10 years. “It just can’t fight the underinvestment in the waterway system, and it is beginning to lose out, particularly to the steel rivers that pull the cargo to West Coast ports,” Kemmsies said.
For Cargill, one of the biggest grain exporters, the waterways system is one of the legs of a three-legged stool for exports and provides competition for the other two modes of railroads and trucks. “Competition is important for keeping the costs down and driving good values for our customers,” Calhoun said. The waterways provide extra capacity during the fall and winter grain harvest when there simply isn’t enough capacity on trucks and railroads. “We need all that capacity to get the job done and serve the world markets. So, for me, the waterways are critical to competition and capacity.”
If the government can’t find a way to adequately fund the repair and maintenance of the decrepit infrastructure on the inland waterways, the U.S. stands to lose its competitive advantage as the low-cost supplier of grain and soybeans to fast-growing markets in Asia. After years of sporadic funding that has gone up and down, the waterways system may be able to get a more reliable source of funding under the separate Water Resources Development bills passed by the House and the Senate, which will be going into negotiations to resolve their differences.
“Both water bills are heavy on reform of funding for repairs of the locks and dams repairs, which just takes too long and winds up costing twice as much under past WRDA acts,” said Debra Colbert, senior vice president of the Waterways Council, an association that lobbies for a well-maintained national system of ports and inland waterways.
She called the prolonged repair of the Olmsted lock and dam on the Ohio River “the poster child” for what’s wrong with the system’s funding and where the funding from the Inland Waterways Trust Fund isn’t being spent.
Lock 52, where Cargill barges encountered the 60-hour delays this month, is part of the project. Congress authorized $775 million for its repair in 1988, of which the barge industry was to have paid half through a user fee of 20 cents per gallon of diesel fuel that goes into the trust fund. Since then the cost of repair has ballooned to $3.1 billion and the project won’t be completed until 2024.
The 300 barge companies that use the waterways system are pushing for an increase in the tax on the diesel fuel they pay to 26 to 29 cents per gallon to provide more funding for the Inland Waterways Trust Fund. “We need to get more money into the trust fund so we can repair the locks in a timely and efficient manner,” Cargill’s Calhoun said.
Republicans in Congress oppose the fee increase because that would mean an increase in the federal match, which they see as a tax increase. Without the increase in funding, the outlook for rehabilitating the system is iffy, and this means private investors would be reluctant to step in.
Grain handlers, whether Cargill or Archer Daniels Midland, base their decisions on whether to invest in new barge-loading facilities or even barge fleets for the waterways system on the predictability of the system.
“If you have only limited resources to invest in a new barge-loading facility or a new rail-shuttle loading facility, why would you invest in a barge-loading facility?” Steenhoek said. “Our government is not sending a compelling message to invest in the inland waterways system.”
He said the agricultural industry doesn’t have the luxury of waiting until a lock gets repaired to ship its products. “By that time, South America will be the supplier of choice for Asia, and there will be a lot of customer demand that’s not fulfilled.”