The effects of the drought last summer through the central portion of North America are still being felt in the grain markets today, and it’s not in the way that you might have expected. The lack of rainfall in June, July, and August of 2012 have resulted in the lowest water levels in the Mississippi River in decades and it’s causing disastrous consequences for commodity shipping in this important commercial gateway. By the end of this week the river’s water depth is expected to be at its shallowest levels since 1988 and the second lowest levels in history.
About $7 billion dollars per month of commodities ship up and down the Mississippi River on barges. In terms of agriculture, primarily these are grain products flowing south to New Orleans to be exported around the world and fertilizer travelling back north on this corridor to replenish those grain fields in the U.S. interior. As navigation conditions deteriorate, so does the flow of commodities; Reuter’s news service reported Jan. 2, that approximately $2.4 billion worth of goods were stalled north of St Louis due to navigation conditions. That’s about three times the value of all of the soybeans which Ontario exports in a year, so it’s a traffic jam of epic proportions.
One of the key issues weighing down the old crop grain futures has been the poor pace of export sales in recent weeks. The ultimate consequence of reducing exports is that it carries the ending stocks and stocks-to-use ratios higher, and begins to put negative pressure on the markets. The best way to rally prices is to make supplies scarce and trapping grain in the interior works against that objective.
To be fair, the barge freight conditions in the Mississippi are not the only reason why exports of grain out of the United States are trailing behind expectations, but it certainly hasn’t helped. Barging grain downstream is a very cost effective means of transportation, and the alternatives, primarily rail shipping to either the Gulf of Mexico or west coast ports, all drive export values higher, making it tougher to sell U.S. grain in a very competitive world market.
If you’re an optimist, one potential outcome of the Mississippi shipping woes is that we might see some additional interest in pulling grain out through the Great Lakes and St Lawrence Seaway. While that might prove to be a unique opportunity to position Ontario grain to be right in the path of an export gateway, Great Lakes ice and the seasonal closure of the locks in the Seaway will limit this developing until at least the spring.
While the dry conditions in the central United States last summer rallied grain prices to the near record highs which we have enjoyed for the past several months, it’s going to take ample precipitation to keep them there. Who would have guessed that it takes rainfall to sustain a drought rally?