Economist’s Angle: Ain’t No River High Enough

Aug 10, 2023

By Kelsey Story • Guest Author/ASA Economics Intern 

Kelsey Story

Kelsey Story

There is a major weather phenomenon that occurs every few years that changes weather patterns all over the world. While La Nina and El Nino mostly affect South American countries, which indirectly affects U.S. trade, there are also direct weather impacts that occur in the U.S. during these opposing time periods. Since late 2020, La Nina has been present all over the world, which resulted in an overall weather trend of a colder and wetter northern U.S. and a warmer and drier southern U.S. In 2023, the weather pattern has shifted toward an El Nino, an occurrence that could be one of the reasons the Midwest is facing drought conditions right now. The map in Figure 1 shows how U.S. weather changes during an El Nino, with much of the region surrounding the Mississippi River falling within the warm and dry part of the country.

Figure 1: El Nino Effects on North America

              Source: NOAA

States all along the northern part of the Mississippi and in the Midwest have been experiencing drought conditions, as shown in Figure 2. This may seem at odds with the fact that many of the upper Midwest states were experiencing flooding in the spring of 2023, but a majority of the ground in these regions did not absorb a large amount of that moisture. This condition was then followed by low rainfall and warmer weather, resulting in states such as Missouri, Illinois, and Iowa experiencing drought conditions of moderate to extreme. Missouri is one of the states that has the most extreme drought conditions; this is concerning not only for the amount of soybeans grown in the region, but also because St. Louis is a major transportation point on the Mississippi River.

Figure 2

During the beginning of July 2021, the Mississippi River at the City of St. Louis had nearly reached the minor flood stage, which is set at 30 feet higher than the base level. In July 2022, the average monthly water level was 8.08 feet, much lower than the previous year of 18.05 feet and an atypical low for the given time of year. Now, in July 2023, the average monthly water levels of the Mississippi River at St. Louis are even lower than in 2022 at 1.24 feet. The current levels of the Mississippi are more consistent with the seasonal lows usually seen in fall and winter. Figure 3 shows the water levels of the Mississippi River at St. Louis every July since 2014. With the current drought conditions and looming threat of limited rainfall forecasted, the Mississippi River levels are not in a good position going into a season of typically low water levels.

Figure 3

Another major trade route is the Panama Canal, where over 70% of the Panama Canal traffic is U.S. commodities. There has been an ongoing drought in Panama for the last couple years, and it is expected to continue, or possibly worsen, with the El Nino weather phenomenon. A major point of concern is the Gatun Lake because of its role in providing water for the lock system. Water from Lake Gatun is used to move vessels through the locks of the canal, and each time a lock is used, 50 million gallons of water end up being drained into surrounding oceans. Gatun Lake is at historically low levels and is expected to reach even lower levels during the month of August. The Panama Canal Authority is projecting Gatun Lake’s water levels to be at 79 feet middle to late August. Normal August water levels for Gatun lake are an average of 85.3 feet over the last five years. With little water for the locks, the Panama Canal Authority will have to place restrictions on draft level and cargo weights. Over the past five years, Gatun Lake tends to have lower levels in April and May but begins to rise throughout the summer and into fall. However, this is not the case in 2023: Water levels in Gatun Lake have not been this low since 2019.

There are two major types of passages through the Panama Canal: the Panamax Locks and the Neopanamax locks. The Neopanamax locks were built in 2016 as part of an expansion project of the Panama Canal. The greatest difference between the old Panamax locks and the new locks is the size of vessels that can pass through each lock. The maximum-sized ship for the Panamax Locks is 965 feet long and 106 feet wide, with a typical draft of 39.5 feet. For the Neopanamax locks, the maximum ship size is 1,200 feet long and 160.7 feet wide, with a typical draft of 49.9 feet. Each lock also has a different system to pull vessels through the locks. The Panamax locks use a team of locomotives to pull a ship through, while the Neopanamax locks use tugs, which have the ability to pull more weight.

In an attempt to preserve the water level of Gatun Lake, a draft restriction of 44 feet was placed on May 30 at the Neopanamax locks. This draft restriction has remained in place since then, and with the looming chance for low rainfall, the Panama Canal Authority currently has no plans to lift it. Not only has the draft restriction been reduced, but also the amount of vessels traveling through the canal per day has been lowered. During a typical day, the Panama Canal will transport 36-38 ships, but this number has been reduced to 32 as a result of water conserving restrictions. Limiting the number of vessels through the canal began on July 30 and will continue until additional information is gathered.

The Panama Canal Authority also had plans to implement additional draft restrictions on the original Panamax locks, but recent rainfall has provided some relief. Restrictions on the Panamax locks, in particular, were postponed since it takes less water for the smaller ships these locks accommodate to travel through. If there is more rainfall in the area, the Panamax locks will more than likely remain unrestricted. However, a dry fall season may lead to Panamax locks restrictions.

The Mississippi River and the Panama Canal are two main waterways for the transportation of agricultural products such as soybeans. Delays in shipping are not only inconvenient, but also could lead to increased transportation costs. Soybean price spread between the origin price and destination price had a large negative spread of -$2.76 the end of July 2022. The July 2023 price spread has a smaller span than in 2022 of -$1.50 but still larger than 2019 (-$1.42) and 2020 (-$1.33) when water levels were normal. Likewise, barge rates on the Mississippi are lower than they were in 2023. They remain higher, however, than in 2019 and 2020, which could explain how the changes in the price spread between this year and last year. If water levels do not improve and transportation costs continue to increase throughout the fall, the price spread will adjust, and producers could bear the weight of these increased costs through lower local prices.