Welcome to CrossDock,
In this issue, we deep dive into how the Mississippi River drought has disrupted the U.S. supply chain, causing barge delays and escalating shipping costs. We'll also examine the Panama Canal crisis, the broader impact of climate change on global supply chains and trade, and the potential economic fallout.
Mississippi Burning
The Mississippi River to the United States is like the Euphrates River to ancient Babylon. Just as the Euphrates nurtured Babylon, fueling its growth and prosperity, the Mississippi has been the lifeline of American trade and commerce for centuries, serving as a critical route for the movement of goods across the United States.
Stretching over 2,350 miles from Lake Itasca in Minnesota to the Gulf of Mexico, it crosses ten states and connects the agricultural heartland of the Midwest to global markets through major ports like New Orleans and South Louisiana.
Historically, the river has played a pivotal role in the economic development of the United States, facilitating the transport of commodities such as grains, coal, and petroleum.
Even today, the Mississippi remains vital to the U.S. economy. It supports around $12.6 billion in annual economic activity and transports over 450 million tons of goods yearly. It is particularly important for the agricultural sector, with around 60% of the country’s grain exports, including corn, soybeans, and wheat, being shipped down the river to ports for export.
This riverine transport is essential for keeping U.S. agricultural products competitive on the global market due to its cost-effectiveness compared to rail or road transport. In short, the Mississippi River system is a crucial cog of the U.S. supply chain, ensuring that commodities can move freely and efficiently from producers to consumers.
Drowned in drought
However, the Mississippi River has been facing twin challenges in recent years: prolonged droughts and declining water levels. The Midwest, which feeds into the river, experienced one of its driest seasons in decades in 2023, and this year is no different – it is the third consecutive year this has happened.
And what’s the reason, you might ask? Actually, a combination of factors largely drove this. The significant cause was the low rainfall levels in the Midwest, which contribute considerably to the water inflow to the Mississippi. For example, cities like Minneapolis and St. Louis reported rainfall deficits of up to 30% below average during crucial months.
Experts also believe the extensive agricultural activity in the region is also a pivotal reason. High water usage for irrigation during dry spells has depleted the groundwater levels that feed into the river.
Chain reaction
With lower water levels, barges, which are the primary means of transporting goods like grains, coal, and petroleum on the river, were forced to carry lighter loads to avoid running aground.
A typical barge, which usually carries around 1,500 tons of cargo, had to reduce its load by 20-30%. This significantly increased the cost per ton-mile of transport. For example, the cost of transporting grain from St. Louis using the barge rose to around $12 per ton in September 2023, up from a more typical $3.99 per ton baseline – a 300% increase.
Next, the reduced capacity led to a scarcity of available barges, driving up shipping costs. During the peak of the drought, the cost of moving goods on the river soared as much as three times the usual rate. For farmers, this meant that the cost of getting their products to market increased dramatically, eating up their already thin profit margins.
Finally, as the river became more difficult to navigate, congestion increased. Barges had to wait for favorable conditions to move, causing delays in the delivery of goods. According to reports, shippers experienced 3 to 5-day delays. This was particularly problematic during the fall harvest season, when the river is typically at its busiest, transporting millions of tons of grain.
With river transport becoming unreliable, shippers had to turn to alternative modes of transport, such as rail and truck. However, these options are more expensive and less efficient for bulk commodities. The increased demand for rail and truck services further strained the logistics network and drove up costs. During the 2023 drought, the cost of transporting grains using rail transport reached up to approximately $70 to $75 per ton, while trucking reached up to $240 per ton.
Image credit: NASA Earth Observatory
In fact, the crisis in Mississippi had global repercussions. The U.S. is a major exporter of agricultural products, and disruptions in the Mississippi River transport affected the global supply of commodities like soybeans and corn.
According to the United States Department of Agriculture, U.S. corn exports dropped significantly, with estimates for the year 2022-23 being lowered by 75 million bushels to 2.075 billion bushels, the lowest since 2019-20. This situation allowed other competitors like Brazil and Argentina to fill the gap in the global market.
The Mississippi situation is a stark reminder of the fragility of our supply chains in the face of climate change.
Sadly, this is not a one-off event. Over the past years, several unprecedented climate-induced phenomena have affected the global supply chains. What’s even more concerning is that the frequency of these disruptions has increased.
Let’s put things in perspective using numbers. The 2020 United Nations Office for Disaster Risk Reduction report recorded 4,212 “natural disasters” from 1980–1999. However, in the next two decades, the number skyrocketed to 7,348. Between 2000 and 2019, according to the report, droughts increased by 28%, with a 232% increase in extreme temperatures, 134% rise in flooding, 40% in storms, and 46% in wildfires.
Another recent climate-related event that deeply affected the global supply chain and maritime trade is the Panama Canal crisis.
Traffic Jam in the Ocean
Image credit: The Guardian
It’s an epic love story. Lake Gatun and the Panama Canal. During the rainy season, the lake rises, powering the canal and guiding ships across continents. She fills the locks, carrying vessels between two mighty oceans.
But last year, an unprecedented drought and El Niño played spoilsport. The rains held back, and Lake Gatun did not rise to her full glory. Water levels dropped, the canal struggled, and ships stood like impatient children in a long queue waiting for their turn, leading to the biggest congestion in the canal’s history. And this dry spell in their relationship sent shockwaves through the global supply chain and international trade.
The Panama Canal is an engineering marvel that connects the Atlantic and Pacific Oceans. The canal normally witnesses more than 13,000 transits annually, accounting for almost 5% of global trade. It relies heavily on freshwater from nearby lakes to fill its lock system.
However, in 2023, a prolonged drought drastically reduced water levels, forcing the Panama Canal Authority to limit the number of daily transits and impose restrictions on the number of ships passing through. The canal, which usually accommodates about 36 vessels per day, had to reduce its daily transits to 22 and 24 vessels. Before the crisis, the canal handled around 1,200 transits per month. During the peak of the drought, this number dropped by almost half, with some vessels waiting up to 21 days to cross.
The Panama Canal typically saves ships traveling between the Atlantic and Pacific Oceans five months of time. However, delays and congestion forced many shipping companies to seek alternative routes, such as detouring around the Cape of Good Hope. Longer routes mean more time and cost to shipping operations.
The increased demand for alternative shipping routes drove up freight rates. Estimates suggest the crisis added approximately $1.1 billion in annual shipping costs. What’s worse, to compensate for the lost time, the ships were compelled to travel faster, burning more fuel per mile and emitting more CO2, further worsening environmental concerns.
As a vital trade route, the Panama Canal typically processes 40% of all U.S. container traffic. The U.S. is a major exporter of agricultural products such as soybeans, corn, and wheat. The Panama Canal handles many of these exports, but its reduced capacity led to delays and increased costs for U.S. farmers. According to experts, U.S. agricultural exports via the canal fell by 17% during the crisis period.
Similarly, the crisis impacted the US energy sector and supply chain. Approximately 5.4 million barrels of crude oil and refined petroleum products are transported monthly between the Midwest and Gulf Coast via the Panama Canal. The crisis disrupted these shipments, leading to potential shortages and increased costs for the US energy sector.
When it rains, it pours. The timing of the Panama Canal crisis couldn’t have been worse. Just as the drought wreaked havoc in Panama, geopolitical tensions disrupted the Suez Canal. Together, these two choke points of global trade created a perfect storm of supply chain disruptions. This crisis served as more than just a wake-up call for shipping companies; it exposed the fragility of global supply chains to climate-related challenges.
Climate change, droughts, and reduced water levels are not just an American story. In fact, they are a global phenomenon.
Image credit: McKinsey & Company
European tale
Since the time of the Romans, the Rhine River has played a vital role in European trade and transportation. It flows through some of Europe’s largest industrial hubs, including Germany, Switzerland, and the Netherlands. It is a key route for transporting raw materials like coal, chemicals, grains, and finished goods. According to the World Economic Forum, it transports around 80% of Germany's 223 million tons of annual cargo.
However, in recent times, primarily due to prolonged droughts and heat waves linked to climate change, the water levels of the river have dropped significantly. And low water levels have translated to fewer cargo ships. In 2022, low water levels forced ships to operate at just 25% of their capacity, leading to increased transportation costs and severe delays across the continent.
This situation has had a ripple effect on industries reliant on river transport. For example, BASF, one of the world's largest chemical producers, had to cut production at its Ludwigshafen plant because barges couldn't carry enough raw materials. Also, the cost of transporting goods by river skyrocketed, with barge fees rising from $4-5 per metric ton to over $40. This impacted not only businesses but also consumers as these costs were passed down the supply chain.
This event severely affected the European energy sector, which is already grappling with the European energy crisis. The sector has been hit hard as coal shipments to power plants in Germany have been delayed. In some cases, power plants have had to reduce output because they couldn’t receive the fuel needed to maintain operations.
Like we mentioned earlier, these disruptions are not isolated events but part of a global pattern of climate-related crises impacting supply chains and economies. For example, the severe drought in China’s Yangtze River led to a significant drop in hydropower production, triggering an energy crisis in one of the world’s largest economies. Similarly, the increasing frequency and intensity of wildfires, such as those in California, devastate communities and disrupt logistics and infrastructure.
Yes, these events alter the world's ecological balance and disrupt the supply chain. But what’s the economic impact of such disruptions?
Economic impact
Global supply chains are complex networks that bring us everything we need, from our morning coffee to the smartphones in our pockets. But they’re also quite fragile. Extreme weather events like floods, hurricanes, and heat waves can disrupt these supply chains and cause significant economic damage.
According to a recent study published in Nature, a leading science weekly journal, supply chain disruptions due to climate change could cause a projected net economic loss of between $3.75 and $24.7 trillion to the global economy by 2060.
Additionally, the study states that major manufacturing countries like China and the US could see economic losses of 2.7% and 1.8% of their GDP due to supply chain disruptions. The implications of this disruption will be felt in multiple sectors and industries. This could lead to job losses and increased costs of goods, affecting people’s daily lives and spending power.
Projected global heat-related losses in the midcentury and their distributions across the world
Credit: Nature
“These projected economic impacts are staggering. These losses get worse the more the planet warms, and when you factor in the effects on global supply chains, it shows how everywhere is at economic risk,” said Professor Dabo Guan, University College London Bartlett School of Sustainable Construction.
What does this mean on a more granular level?
Take India, for example, which depends heavily on imports of edible oils, sugar, and other commodities from countries like Indonesia and Malaysia. As these regions face erratic weather patterns, their agricultural output declines, creating a domino effect on India's food supply. This, in turn, can drive up global food prices.
The Nature study also warns that the U.S. could see a 0.9% to 2.3% loss in its food manufacturing sector due to these interconnected disruptions, underscoring just how fragile these supply chain systems are.
In a world heavily reliant on “just-in-time” inventory, where consumers expect fully stocked shelves and next-day or even same-day delivery, minor supply chain disruptions are usually absorbed without much notice. However, a major disruption can swiftly escalate, causing widespread shortages, empty shelves, and frustrated customers.
The countermeasures to prevent or reduce climate change's impact will be expensive. Let’s take ports as examples. The rising sea levels pose a grave threat to the world’s seaports, which handle 90% of global trade.
The cost of elevating infrastructure at just the top 100 U.S. ports is estimated to be between $69 billion and $103 billion. These costs, while necessary, are a heavy financial burden that many developing countries simply cannot bear. In addition to this, there are economic losses due to port closures or reduced shipping capacity.
Image credit: Reuters
And this trickles down to shipping costs. The shipping industry, already sensitive to disruptions, saw costs skyrocket during the COVID-19 pandemic. For example, container shipping rates across the Pacific surged to as much as $20,000 per container, partly due to pandemic-related disruptions. This spike, though short-lived, is a sign of the volatility we can expect as climate change intensifies. Higher shipping costs directly affect the price of goods, from raw materials to consumer products, making the overall economic impact even more severe.
So, how prepared are businesses and governments to adapt to these rapidly changing conditions and build more resilient and adaptive supply chains that can withstand such challenges?
Counter strike
Both companies and governments are actively working to safeguard supply chains from the impacts of climate change. For example, Walmart has implemented advanced climate modeling and scenario-based risk assessments as part of its supply chain management strategy. They periodically conduct in-depth climate risk assessments to identify vulnerabilities and mitigate potential disruptions caused by extreme weather events. This approach helps them adapt their supply chains to changing conditions and maintain stability in the face of climate-related challenges.
Another significant step worth noting in the Biden-Harris administration is the climate adaptation plans of federal agencies. To build climate-resilient supply chains, agencies are taking proactive steps such as assessing mission-critical supply chains, diversifying their supplier base, and promoting climate-smart sourcing strategies. As part of the plan, more than $50 billion is being delivered to support climate adaptation and resilience initiatives across various sectors and communities.
Image credit: Business for Social Responsibility
The National Aeronautics and Space Administration (NASA) is developing an advanced toolset designed to analyze climate-related risks and real-time disaster impacts on its supply chains, enabling them to better manage disruptions.
Similarly, the U.S. Army Corps of Engineers is evaluating their suppliers' locations, infrastructure, and vulnerabilities. This includes identifying critical supply chain nodes like ports, warehouses, and transportation routes that are susceptible to climate change effects, ensuring that these essential components remain operational and resilient in the face of increasing environmental challenges.’’
Japan has been investing in climate-resilient infrastructure for key logistics hubs, such as ports and airports, to withstand natural disasters like typhoons and earthquakes. These measures are part of a broader effort to ensure that critical supply chain nodes remain operational during and after extreme weather events.
Thanks to the latest tech, businesses can now anticipate and detect unforeseen risks further down the supply chain. Using advanced technologies like AI and IoT, companies can get real-time visibility into critical elements such as supplier locations, environmental conditions, and emerging disruptions.
With these tools, companies can not only track what’s happening but also predict potential issues. For example, IBM’s Watson Supply Chain uses AI to forecast disruptions before they happen, giving businesses the chance to re-route shipments or find alternative suppliers.
Similarly, Resilinc, a supply chain monitoring solution, employs AI and machine learning to monitor global supply chain risks in real time. The platform analyzes millions of data points daily, including social media, news reports, and regulatory filings, to detect potential disruptions such as natural disasters, factory fires, and labor strikes.
It’s naive to think that global climate change is a distant concept — it is real, and it is happening now. It’s impossible to contain nature’s fury with human effort, but we can control how we prepare and respond. In the world of supply chains, that means being one step ahead — anticipating disruptions, building flexibility into our systems, and having backup plans ready.