Index > Briefing
Friday, December 08, 2023
Severe Drought Crisis Affects Supply and Consumption Chains
He Jun

Since the beginning of this year, droughts have once again ravaged multiple regions globally. Their impact extends beyond agriculture, uncommonly affecting the global supply chain and causing disruptions in the global consumption chain.

As early as August this year, Ilya Espino, deputy administrator of the Panama Canal Authority (ACP), warned that if the region where the Panama Canal is located does not receive sufficient rainfall in the coming months, the current transit restrictions implemented in response to the drought would be extended by a year. Shipbroker Intermodal stated that the Panama Canal is still struggling to cope with the effects of the historically dry climate. The drought has compelled the ACP to conserve water, continuously extending restrictions on the maximum draft of vessels and the daily transit limit for ships.

The Panama Canal is a crucial maritime passage connecting the Pacific and Atlantic Oceans, with over 14,000 vessels passing through it in 2022. The majority of these are container ships, transporting over 40% of goods from Northeast Asia to the U.S. East Coast. However, this year's drought has reduced the canal's capacity, significantly impacting the global shipping industry. Analysts at Intermodal state that congestion in the Panama Canal has increased transportation costs and ship delays. A long queue of vessels awaiting transit has led to rising freight rates, severely affecting trade routes that rely on the Panama Canal. According to data from the ACP in August of this year, unreserved transits took an average of 9 to 11 days to transit the canal.

The restrictions imposed on the Panama Canal have impacted approximately 170 countries and nearly all types of commodities. This is particularly true for bulk carriers transporting corn and iron ore, as well as tankers transporting oil, LNG, and chemicals. Shipowners and operators are faced with difficult decisions in dealing with the challenges brought by the drought: whether to reduce cargo loads and endure delays or seek alternative routes, but either choice comes with increased costs. Due to the blockage in the Panama Canal, some vessels loaded with coal and LNG have been forced to reroute through the Suez Canal.

Severe drought has affected not only key maritime waterways but also important inland shipping in some countries.

Due to intensified drought in the U.S. Midwest this year, the artery of U.S. agricultural product transportation, the Mississippi River, is approaching its lowest water levels in over three decades. The declining water levels during the U.S. grain harvesting season are making local crop transportation more challenging, increasing transportation costs, and subsequently raising grain prices. The Mississippi River basin accounts for 92% of the U.S. agricultural product export area and 78% of global exports of feed grains and soybeans. This crucial waterway for agricultural, petroleum, and construction material transportation has suffered during this year's drought, with barges stranded on sandbars, and many ports and docks having insufficient water depth for the safe arrival of cargo ships, leading to increased costs for alternative transportation like railways.

Historically, shipping along the Mississippi River and its tributaries has been cheaper than other modes of transportation. However, in recent times, due to drought, the number of vessels transporting goods has decreased, leading to soaring prices. According to data from the U.S. Department of Agriculture, on October 11, the cost of shipping one ton of corn, soybeans, or other grains from St. Louis to southern Louisiana reached USD 105.85. This figure was USD 49.88 on September 27 and USD 28.45 on October 5, showing there was a significant increase. The soybean production in the six states of the U.S. Midwest accounts for 57% of the total U.S. production. Most of these soybeans are transported to the Mississippi Gulf and then by rail to the Pacific Northwest before being transferred to export ports. The low water levels in the Mississippi River lead to reduced shipping capacity and increased costs, thereby impacting the global grain market.

Climate change has intensified the frequency and severity of extreme weather events, particularly widespread and severe droughts. This not only affects crop production but also severely disrupts the transportation and supply of agricultural products. In recent years, the East African region has experienced severe drought, leading to a significant reduction in food production, impacting local food security, and affecting global food market supply. It is noteworthy that severe drought, coupled with regional conflicts and political instability, exacerbates the threats faced by the global food market. War-ridden regions like Syria and Ukraine not only result in casualties and humanitarian crises but also disrupt agricultural production and supply chains. Conflicts prevent farmers from normal cultivation and harvesting, leaving fields abandoned or damaged. This hampers the transportation and sale of agricultural products, thereby affecting the stability and supply of the global food market.

ANBOUND’s founder Kung Chan pointed out that this year's crisis caused by drought is continually expanding. It will not only severely impact the global supply chain but also affect the prices of food and other commodities, subsequently influencing the consumption chain. Urban economic researchers have previously considered the consumption chain to be a series of interconnected, closely related, and mutually influential links that are in constant motion. For example, the mainstream urban consumer groups engage in various consumption behaviors in urban business districts, such as dining, beauty, leisure, fashion shopping, and lifestyle services. These consumption activities form a series of interrelated consumption chains.

However, ANBOUND's researchers propose a significantly different interpretation of the "consumption chain" compared to the concept mentioned above. It refers to a series of consumption activities related to various stages of the supply chain, such as trade, logistics, and commercial activities. This can be considered as the corresponding consumption activities to the stages of the supply chain. If supply chain activities are affected, the consumption chain will undergo changes due to the corresponding impacts. The severe drought crisis affects food production, which, in turn, affects the supply chain by influencing river and sea transportation. From our perspective, the drought crisis affects the consumption chain through two aspects. Firstly, it affects the supply chains of goods and related products, therefore international trade that used to flow smoothly is disrupted because the supply chain is blocked, impacting related consumption activities. Secondly, it is through disrupting prices and affecting consumption. Prices of goods that were acceptable under normal trade conditions become exorbitant due to disruptions in the supply chain, inevitably affecting corresponding consumption activities. Both types of changes contribute to alterations in the consumption chain.

Final analysis conclusion:

The impact of global climate change on humanity is becoming increasingly apparent. This year, as severe drought expands into a crisis, it not only significantly affects the global supply chain but also influences the prices of commodities in many countries and disrupts the normal consumption chain.

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