Pulsating Market Boundaries and Spatial Arbitrage in US Gulf Region: Impact of Panama Canal Expansion on US Agriculture

US agricultural exports reached a record high of $137.37 billion for fiscal year (FY) 2011, an increase of 26.5 percent from FY 2010. Export capacity of bulk grain and soybean is expanding at 10 percent nationally with up to 30 percent in Pacific North West. Several other expansions have taken place with two Greenfield facilities under development one of which is opening for 2011 fall harvest. Total US grain and soybean exports are forecasted to increase more than one billion bushels or 25 percent from 2011/12 to 2020/21. Most of these exports are expected through center gulf driven towards East Asian countries via Panama Canal. Panama Canal currently handles 44 percent of total US exports. Some of the prospects from expansion of Panama Canal include increased loadings per vessel use of larger vessel size along with reduced canal transit time and lower transportation cost (overall). Grain exports are mostly exported during short time of the year, for example, soybeans are mostly exported from mid-September to mid-February. Such dynamics require efficient throughput capabilities. Other crops like Wheat and Corn have similar periodic surges and compete with surges in supply of other crops. Increased capacity of inland shuttle locations and elevators, with reduction in loading time (increased efficiency gained from technology advancement at loading facilities) combined with increased handling capacity at ports expected to benefit from panama canal expansion will open up more draw areas or increase existing draw areas for crops producing/supplying regions. This means that the areas farther away from ports may be able to export considering the expected gain in transportation cost. This study will focus on spatial arbitrage and pulsating market boundaries for some of crops at key ports specifically located in US Gulf Region and their expected impacts on US agriculture. Market boundaries (area from which the supply is drawn) for ports are expected to increase with Panama Canal expansion combined with ongoing expansion at shuttle elevators elsewhere in inland. Market boundaries are subject to price expected at destination minus the total transportation cost. Other factors that might influence the market boundaries are reliability (risk) in terms of price and volume, cost of congestion and delay time may also play a role. Since these market boundaries are subject to spatial arbitrage (difference in markets located at different geographical region), draw area is expected to change as when any of parameters affecting price at destination and transportation costs are changed. Volatility in price and transportation cost will cause change in draw areas until equilibrium is reached. This equilibrium will be defined by maximum profit that a farm/elevator/shuttle in crop producing region can expect by exporting through different ports. Choice of ports will be based on maximizing profit. Origins at boundaries are expected to be indifferent in shipping to more than one ports, however, the convenience and other factors might play important role for shipper. With price volatility and different transportation cost (determined by rates at different volume between same pair of origins and destinations, and different ports), a rational shipper is expected to maximize profit while minimizing risk. Price at destination and transportation cost are treated as random with certain distribution and expected gains will be compared from existing Panamax rates with those of post-expansion. Other variables such existing capacities of shuttle/elevators will be treated as fixed in base case and then relaxed in sensitivities. Optimization of maximum profit through various combinations of shuttle and ports will be calculated by SAS or other statistical package and spatial aspect of distance and locations will be handled by using ArcMap (ESRI). Key ports of consideration are primarily on east coast. Other ports will be considered based on their relevance to crop supplying regions. Corn and soybean will be potential crops to be analyzed.