Mississippi River drought: Impacts on the agribusiness chain

The Mississippi River is experiencing its worst drought in 30 years, complicating commodity transport in the region. Find out more about this theme!

November 28, 2022

hEDGEpoint Global Markets

In the agribusiness chain, what happens anywhere in the world can impact other regions and continents. Natural phenomena, beyond the control of humans, are still major challenges for those working in the commodity markets.

Rains, floods, droughts, extreme heat, frosts, tornadoes, and other meteorological events can directly impact food production—whether plant or animal—and consequently market values.

Thus, those who work with the commodity chain must always be aware of the climate, the different seasons, and the effects of climate change—not only here, but worldwide.

This is the case with the current drought related to the Mississippi River, which rises in the north of Minnesota state, crosses the entire United States, and pours its waters into the Gulf of Mexico, after a course of 3,800 kms. It’s the largest river in the country, and the main channel for transporting grain (via barge) for global export.

What’s happening to the Mississippi River?

The Mississippi River has recorded low water levels the likes of which haven’t been seen in more than 30 years. October is already a month when there’s little rain in the US. But this year, the lack of it has caused a drought that mainly affects the Ohio River Valley and the Upper Mississippi—in the Midwest and Great Lakes region.

As a result, there have already been cases of barges stranded on sandbars, as the depth isn’t sufficient to navigate, and ruptures in the cables connecting trailers and barges.

To make matters worse, the prospects for the coming months aren’t looking good. The cold of winter’s approaching in the northern hemisphere, and there’s no forecast of rain for now, aggravating the drought that’s already affecting 59% of the country.

Why does the Mississippi River drought affect the grain market?

The Mississippi River is the longest river in not only the US, but also in all North America. It transports at least two-thirds of the grain exported by sea in the US.

Normally, during the last quarter of the year (the period from October to December), it would be common to see around 40 barges on the river—each with the capacity to transport the equivalent of 15 wagons and 60 trailers. But over the same period in 2022, the average has dropped to just 24 to 25 at a time, depending on the water level.

The lower the Mississippi River’s water level, the greater the influence of this problem is the Chicago Board of Trade corn prices. The prices for river transport more than doubled in a matter of weeks, and didn’t stop rising during the harvest period.

The cost of shipping a ton has tripled in value at times. Farmers, producers, and others related to the commodity chain have rushed to ensure transport, or have looked for other outlets, such as railroads, for example. But they’re already struggling to find workers, as demand has soared.

When changes like this occur in grain transportation, mainly soybeans and corn (the ones that use the Mississippi the most), what can happen is that soybean prices lose ground on the Chicago Board of Trade, while premiums soar in the Gulf of Mexico.

How does the Mississippi River drought impact the grain market?

Currently, the three largest soybean producers in the world are: Brazil, the US, and Argentina. Here’s the ranking in tons per year (according to a 2021 survey by the United States Department of Agriculture [USDA]):

  • Brazil – 127 million tons
  • US – 121.5 million tons
  • Argentina – 43.9 million tons

They’re followed by China, India, and Paraguay.

The ranking of the largest corn producers is:

  • US – 382.8 million tons
  • China – 272.5 million tons
  • Brazil – 116 million tons

They’re followed by the European Union, Argentina, and Ukraine.

Other countries may be called upon to fill the US demand gap. China, which is the largest consumer of soybeans in the world, usually imports both from Brazil and the US. At this time of year, it prefers the North American country because it’s harvest season there and has more attractive prices. However, taking into account the current scenario, buying from Brazil may be the best option.

In addition, Brazil is already preparing for its harvest in January, when a record number is expected. But the entire chain needs to be aware of possible changes in the scenario, with weather unpredictability and changes in the Chinese appetite being the main factors to monitor.

How do you protect yourself from market fluctuations with a hedging strategy?

With so many variations that affect unstable commodity markets, it’s essential to have a plan that provides security and more predictability for the future of your business.

Using a hedging strategy is the best option to avoid unpleasant surprises in the financial planning of those who work with the commodity chain. A hEDGEpoint specialty, this mechanism operates as a kind of insurance against market price variations, reducing transaction risks.

hEDGEpoint combines the knowledge of specialists, who know the field and its numerous variables, with risk management solutions through technology and customized consulting, to always offer the best experience in future operations.

We’re present on five continents, always ready to serve you—anytime and anywhere. Contact a consultant to learn more about how to use this special instrument for your business.

Talk to a hEDGEpoint specialist.

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