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A deeper Mississippi River will improve the economics of soybean exports
After many years, the Mississippi River will finally get deepened, aiding the barges that carry U.S. farmers' commodities to the Gulf of Mexico.
This week, the U.S. Army Corps of Engineers announced the funding approval to deepen the Mississippi River in its 2020 plan.
The project focuses on a stretch located toward the end of the river, but it's expected to help Corn Belt farmers with better prices from an improved supply chain.
Successful Farming discussed the impact of this project for Midwest farmers with Mike Steenhoek, the Executive Director of the Soy Transportation Coalition.
Successful Farming: How long has this project been pushed for?
Mike Steenhoek: I mean, this has been years in the making. It really kind of accelerated a few years ago when Congress, in 2016, adjusted the cost-share requirements for this project. Historically, it was a 50% Federal obligation [and] 50% non-Federal obligation if you wanted to do a project like this – deepen the lower Mississippi River.
What they did in 2016, is they changed that cost ratio to 75% Federal [and] 25% non-Federal, so there was a lot of effort before to try to get the lower Mississippi River deepened, but this made it kind of more feasible if the Federal Government could step up and provide that 75%, it made it more feasible to get non-Federal funding.
That seemed to add some adrenaline to this whole discussion, and where the state of Louisiana really contemplated more about could they come up with some of the non-Federal funding, kind of making sure we’ve updated the economics of what the benefit would be if you deepened it.
The Corp of Engineers took another look at what the benefit-cost would be of this project, are there any environmental concerns if the project were to go forward, so a lot of those things have happened over these past three years where it really became more of an acute focus.
We ended up getting more and more involved because one of my conclusions was that this is a project that should not just be regarded as a Louisiana thing, it should be regarded as an Iowa thing, an Illinois thing, a Minnesota thing, an Ohio thing, etc. I thought it was really incumbent upon the Midwest to get more actively engaged in this.
The folks down in Southern Louisiana were doing excellent work promoting it, but I thought we could really expand the number of stakeholders if we tried to generate buy-in from agriculture and others representing the Midwest, so we did some research.
It was research released in summer of 2018 that showed to what extent soybean farmers in the Midwest benefit if this project were to come to fruition, and the numbers were very compelling. It showed it would enhance our competitiveness, but arguably more importantly, it would provide benefit to farmers locally in the form of a more favorable basis. The price they receive at point of sale will improve because the supply chain is going to become more efficient and more economical, and farmers will benefit from that to the tune, according to our research, of $461 million on an annual basis.
SF: Can you breakdown the supply chain savings, and how that extends to farmers?
MS: When farmers make a delivery at, say a barge loading facility, the price they receive is so much a function how efficient that transportation system is after the delivery occurs, and farmers they’ve had experience with this.
They will see if all of a sudden, you have a lock and dam closed, farmers will see ‘Wow, the basis has really widened or the price I’m receiving has decreased; what happened? It’s not because my soybeans are in subpar condition or because demand has changed.’ It’s just because you can’t move product as efficiently.
Kind of the metaphor is if you’re a barge-loading facility, and for whatever reason – it could be a problem at a lock and dam, it could be a problem down at the port region near New Orleans – if you have an inability to move product out your back door, you’re going to be reluctant to accept product via your front door and have farmers deliver it to you.
How they respond often to those situations is they’ll drop the price to try and discourage farmers from making those deliveries, and we saw a really pronounced example of that during Hurricane Katrina in 2005.
Where that region essentially shut down for a period of time, and farmers saw their price become less favorable, their basis widened because of something that happened 900 miles away. It’s a phenomenon farmers are increasingly attuned to.
When it becomes less efficient, less economical, those costs are usually passed on to farmers. When it improves, farmers can benefit from that, so that’s what’s really fighting for us, is that you have this prospect for farmers to benefit in the form of the price they receive.
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SF: With more carrying capacity allowed, will traffic on the Mississippi River be affected?
MS: There are two links in the chain we’re talking about. The first link is that barge movement, so if you’re loading soybeans in Davenport, Iowa, those are put into a shallow-draft barge – these kind of rectangular shipping containers that you can put 50 to 60,000 bushels of soybeans per barge.
Then, you lash a bunch of them together, you have a tow boat, and then you push it all the way down to the lower Mississippi River. Those are unloaded, put into storage, and then the second logistical step is then it’s put into an ocean vessel, kind of by New Orleans. Those hold over 2.0 million bushels of soybeans per vessel.
It’s not going to have as big of an impact on the upper Mississippi River in terms of congestion because those are still going to be kind of the same barge movements down to the lower parts of the river.
What you’ll see in the lower Mississippi River is anytime you can put more revenue-producing freight per vessel, that improves the economics of it. It could have an impact on congestion. Of course, what we don’t know is by making the lower river more competitive, will that increase the demand for it. Will that be a draw for additional ships, that’s something we don’t know.
Certainly, we can say with confidence, that it will improve the economics of soybean exports because you’re putting more revenue-producing freight per vessel.
SF: How will this affect the rail side of transporting?
MS: That’s something that there’s a lot of ifs associated with, but we did a quality effort to try and project what those savings could be. One of the realities you see demonstrated throughout the whole ag supply chain is when you have modal competition between barge and rail, that will result in downward pressure on transportation costs – things like rail rates.
Because they’re having to fight more for business, and the areas of the country where you see the most pronounced rail rates are those where you don’t have modal competition. When you make that whole supply chain – that barge to ocean vessel supply chain – more efficient, what you’re essentially doing is you’re increasing that draw area to the river.
More and more grain shippers will say ‘Maybe we should consider the river because it’s becoming more economical. Maybe we’re willing to drive farther in our trucks to get to the Mississippi River in order to access that.’ When you put that draw area out, you create more overlap between the area serviced by barge and area serviced by rail.
That’s what we’re really attempting to do with quantifying how farmers in Nebraska, North Dakota, South Dakota, they could benefit from that just in the form of more competitive rail rates.
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SF: Why should farmers be interested in this?
MS: These waterways are really the reason why agriculture is such an international enterprise. Most farmers are located in the interior part of the country. The reason why they’re able to benefit from this international demand is because you have this multi-modal transportation system that includes the waterways that connects what farmers grow with international customers.
These supply chain issues are really critical. If you didn’t have that, then farmers would only be able to sell to customers nearby in their backyard. It’s having this infrastructure that allows them to benefit from this demand from all of these other countries that don’t have the capacity to efficiently feed themselves. Yet, we’re in the U.S. where we do it better than anyone else, so we’re able to benefit from that, but we’ve got to have that infrastructure.