Was the Stuck Ship a Big Deal?
Last week, a massive cargo ship ran aground in the Suez Canal. The battle to free it captivated the world, although it's possible most people were in it for the memes. Was it a big deal or merely an entertaining distraction?
It was clearly a big deal for those affected directly (e.g., operators of the Ever Given and other delayed ships, firms and consumers affected by delayed delivery, livestock stuck on ships). However, I argue in this article that it was not a big deal for global agriculture and I think the same is true for global trade more broadly.
About 50 ships pass through the Suez Canal on a typical day. In 2019, 28% were container ships, 27% were oil tankers, and 22% were bulk carriers of products such as grains, fertilizer, and iron ore. Container ships alone carry about $10b worth of cargo through the canal each day.
Some media outlets latched onto the $10b number as the daily cost of the canal being closed, or they divided by 24 to get $400m as the hourly cost. This is wrong for two reasons. First, those $10b in cargo are not lost; they are merely delayed. Most containered products would not have spoiled in a week, so the cost of the delay is a fraction of the value of the cargo. Second, the $10b number excludes the other categories of ship such as tankers and bulk carriers.
About 15% of global wheat and rice exports flow through the Suez Canal. These are mostly wheat from Russia, Ukraine, and the EU heading to Asia, and rice from India, Thailand, and Vietnam heading to Europe. Much smaller proportions of corn and soybeans travel through the Suez Canal.
So how could one measure the economic effects of this event? One way is to look at prices. If a transportation bottleneck hurts buyers, then they will look to buy from someone else thereby driving up the price in their location. If sellers can't wait for the delay to resolve and have to offload their product, then the price at the selling location will drop. If it costs extra to transport items using alternate routes, then shipping prices will increase.
This is exactly the analysis Jim Bushnell, Jon Hughes, and I did in a recent paper on a transportation bottleneck in the US Great Plains. Oil production in North Dakota boomed in 2013 and 2014 causing rail lines to be clogged up with trains carrying oil out of the state, which allegedly caused long shipping delays for agricultural products and imposed costs on farmers.
We show that the difference in the price of wheat between North Dakota and Minneapolis increased dramatically when oil transport by rail increased. This finding indicates that the cost of transporting wheat from North Dakota to Minneapolis increased. We show using time series techniques that nearly all of the wheat spread increase comes from an increase in the Minneapolis price with only a small decrease in elevator prices paid to North Dakota farmers.
We also looked directly at rail transportation costs. During times of high demand or congestion, railroads use auctions to allocate grain railcar capacity. In these auctions, a shipper can buy a guarantee that an empty railcar will be delivered to its facility by a specified date. We show that auction prices for grain railcars increased by a similar amount to the wheat price spread during the period when oil cars clogged up rail lines. We conclude that the railways used railcar auctions to allocate scarce capacity to the customers with the highest willingness to pay, namely buyers of hard red spring wheat.
We found much smaller effects for corn and soybeans. There are two reasons for this. First, North Dakota produces half of US hard red spring wheat, but less than 5% of corn and soybeans. Corn and soybean buyers could easily switch to other suppliers during the congestion period, whereas wheat buyers could not. Second, it wasn't very expensive to store corn and soybeans for a couple of extra months until the rail lines cleared.
Ukrainian exporters ship wheat through the Suez Canal, so if the blockage affected wheat markets, we would expect to see prices in Ukraine decrease relative to prices elsewhere in the world. I see no evidence that this occurred.
The Ever Given got stuck on March 23 and was freed on March 29. Wheat export bids in Ukraine dropped from 8000 Hryvnia per ton on March 19 to 7800 on March 26, a decline of 2.5% (these prices are reported weekly). During the same period, hard red winter wheat prices at the Chicago Mercantile Exchange dropped by 2.9%. In both markets, these declines continued downward trends that began in late February.
Regarding transportation costs, the Baltic Exchange in London reports the Baltic Dry Index (BDI), which tracks the price of shipping raw materials such as grain, fertilizer, and iron ore by sea. If the Suez Canal incident had raised the cost of shipping, then we would expect to see the BDI increase.
The BDI increased by 80% from early February until March 19. This increase likely reflects the improving global economy because increased demand for shipping raises the price of shipping. In fact the BDI is often used by economists as a measure of real economic activity (e.g., this paper by Lutz Kilian and this paper by Colin Carter, Gordon Rausser, and me). Since March 19, the BDI has decreased by 10%, which is not consistent with the notion that the Suez Canal incident raised shipping costs.
Looking beyond agriculture, the buyers or sellers most affected by the Suez Canal blockage would have been those for whom a delay is very costly. A factory that didn't receive parts it was expecting may have had to stop production. An exporter may have had to offload inventory at a low price because there was no ship available to take it away. In the language of economics, events like this are costly for entities with inelastic short-run demand or supply.
In the big picture, the Ever Given was stuck in the Suez Canal for a week, and it may take another week to clear the backlog of ships. A week is 2% of the year. Just like eating unhealthily for one week a year will not affect your waistline substantially, a one-week canal closure will not have substantial effects on global trade. A permanent closure of the canal would obviously have a much greater effect. This paper estimates that closing the Suez Canal permanently would reduce global exports by 3.5%.
A brand new NBER paper shows that bulk shipping costs have declined over time and that recent fluctuations in freight rates are caused much more by changes in demand from shippers than changes in the cost of shipping. However, if events like this increase in frequency, either at the Suez Canal or other chokepoints such as the Panama Canal, the Turkish Straits, or the Strait of Malacca, then costs will accumulate. An increase in chokepoint blockages could occur due to aging infrastructure, the changing climate, or increased congestion. It would cause shippers to use more costly routes and create the need to improve infrastructure. This report by Chatham House analyzes in depth the potential vulnerabilities and their implications for global food trade.