This week, our Nature Team wraps up their series “The True Price of Produce” with a look at how Latin America’s water cycle shapes US markets.

by Amelia Sadler and David Sternlicht

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Key Takeaways:

• Latin America's Water Systems Impact U.S. Economic Stability: Unsustainable management could lead to higher costs, delays, and billions in lost exports for a $1.5 trillion sector.
• Deforestation's Impact on Climate and Agriculture: Latin American rainforests help sustain global water cycles, including rain patterns in the U.S. Midwest. Deforestation disrupts these atmospheric rivers, which could reduce crop yields and raise costs for U.S. farmers.
• Investing in Nature for Economic Security: Solutions like agroforestry and watershed conservation can help stabilize the water systems essential for U.S. trade. 

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In our third and final installment of “The True Price of Produce,” a series of insights on the intractable link between Latin America's ecological health and the United States’ economy, we turn to the importance of water. In particular, we focus on the integrity of water systems, rainforests, and watersheds, which exert direct economic influence on everything from agricultural trade to industrial output. Without the sustainable management of the region’s freshwater resources, American farmers, food distributors, and grocery retailers will face higher costs, delayed shipments, and billions in lost export opportunities — threatening a $1.5 trillion dollar industry.

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The Panama Canal: An Artery of International Trade

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The Panama Canal is perhaps the most salient example of the intersection of water conservation and global commerce. As the western hemisphere’s only waterway connecting the Atlantic and Pacific oceans, the Panama Canal facilitates the annual movement of 40% of U.S. container vessels carrying key agricultural exports, including soy, corn, and wheat to markets in Asia and the Pacific. In 2022, 80% of all U.S. grain exports passed through the canal, which represents a meaningful portion of the $270 billion in annual cargo that traverses the crossing. 

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The timely delivery of products that rely on this 110-year-old infrastructure hinges on an abundant and reliable water supply. Each ship passing through the canal requires roughly 70 Olympic-sized swimming pools of fresh water to move through its locks, sourced primarily from Gatun Lake, one of the world’s largest artificial reservoirs and an integral component of the canal’s engineering. On a weekly basis, the canal facilitates the transit of roughly 224 vessels, requiring nearly 10.5 billion gallons of water, and trades nearly 8,000 miles of travel for a single day canal crossing.

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Panama, one of the wettest countries on Earth, has historically received sufficient rainfall to meet this demand. However, during a particularly dry 2023 El Niño event, the Panama Canal river basin experienced its second-driest year in recorded history, exacerbating already strained water systems. This drop in precipitation forced the Panama Canal Authority to cut the number of ships passing through daily from 38 to 20, resulting in delays, supply chain disruptions, and increased costs for American exporters. Ships that chose to avoid the congested Panama Canal and venture around Chile’s Cape Horn experienced a twofold increase in transit time, up to tenfold higher transportation costs, and significantly higher carbon emissions. While the canal is back to operating at around 32 vessels per day in the second half of 2024, the canal’s infrastructure and throughput remains highly susceptible to water level fluctuations.

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Deforestation: A Domino Effect on U.S. Agriculture

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While deforestation may not be top of mind when contemplating the Panama Canal, it exerts a powerful influence on the region’s climate, with widespread ripple effects on global shipping, food production, and economic output. The tropical forests of Latin America provide more global ecosystem services than carbon sequestration alone: 

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• Tropical forests are natural water reservoirs. A single square meter of rainforest can evaporate eight to ten times more water than a square meter of ocean. As a result, Latin American rainforests are essential not only for maintaining local rainfall but also for sustaining long-range atmospheric rivers, water vapor corridors that help irrigate regions thousands of miles away — including the American Midwest.

• Forests also act as key moderators of global temperature and weather patterns. Water vapor is Earth’s most abundant greenhouse gas and the major amplifier of global temperature systems, making dry regions drier and wet regions wetter through disruptions to these rain-fed atmospheric rivers. When it comes to regional climate change, impacts from land-use change have more explanatory power than greenhouse gasses.

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Despite the ecological and economic importance of its forests, Latin America has lost more forest cover than the landmass of Peru in just the past two decades. The region’s forests are nearing a tipping point after which they may no longer produce enough rain to sustain local ecosystems or moisture plumes (the source of atmospheric rivers that move north from lower latitudes). This disruption to the water cycle is already having severe consequences as the Panama Canal’s Gatun Lake reached its lowest levels since 1965 last year. Beyond maritime trade, farmers from Bolivia to Michigan may face lower crop yields and increased irrigation costs, directly impacting food prices and economic stability. Should these forests reach such a precipice, the land may very well transition to a savannah, drying up atmospheric rivers and, in turn, reducing output in U.S. agricultural heartlands, to say nothing of the environmental costs of such a natural system collapse.

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Solutions: Agroforestry and Watershed Conservation 

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Various cost-effective landscape restoration approaches are arising to combat the loss of Latin American forest cover and the disruption of the western hemisphere’s water cycle. Agroforestry, the practice of growing a combination of trees and shrubs with crops and/or livestock, has proven particularly effective in stabilizing water supplies and improving farmland resilience. By integrating tree planting with agriculture, farmers help reduce soil erosion, provide ground cover, conserve moisture, and create microclimates that sustain agricultural productivity. These efforts also contribute to carbon sequestration while promoting sustainable livelihoods for rural communities. 

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Recognizing the importance of water to canal operations, the Panama Canal Authority has invested in watershed conservation over the past two decades, including reforestation efforts and agroforestry practices, with some success. These nature-based solutions increase soil infiltration, reduce runoff, and recharge groundwater supplies — helping ensure that critical infrastructure, such as the canal, remains operational even in drier years. However, significantly more capital is needed to scale these initiatives as the health of the Panamanian watershed depends on the health of landscapes as far south as the Amazon basin. Without functioning rainforests and well-managed watersheds across the entire region, disruptions to the canal — and the resulting economic fallout, which could reduce US GDP by $1.5 billion per week — will become increasingly frequent.

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Conclusion: Investing in Water Security Means Investing in Nature

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The influence of Latin American forests on international shipping and atmospheric irrigation offers a glimpse of the economic threats facing the United States if ecosystem degradation in the tropics continues, to say nothing about the impacts ecosystem disruption can have on the livelihoods of Indigenous Peoples and local communities. For American businesses reliant on exports, including U.S. farmers, and logistics carriers, this is an ongoing struggle.

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Investors have a unique opportunity to fund projects that protect Latin America’s natural infrastructure. Reforestation, watershed conservation, and agroforestry are not only environmental imperatives but also strategic investments that safeguard U.S. economic interests. Just as the U.S. food system depends on Latin American crops, it also relies on healthy water cycles to keep trade flowing. Addressing deforestation and supporting nature-based solutions are essential steps toward securing not just the ecological future of Latin America but also the economic stability of the United States. 

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