By Carey Gillam and Charles Abbott

KANSAS CITY/WASHINGTON (Reuters) - A low-water crisis now plaguing part of the Mississippi River system will boost industry arguments for long-delayed government improvement projects along U.S. rivers, though looming federal budget battles remain a high hurdle.

Experts say even as billions of dollars of river-borne commerce slow along the shallow section of the Mississippi, an even larger economic catastrophe is looming as dozens of critical infrastructure improvements and repairs up and down the entire U.S. river system remain long overdue.

"The waterways industry in recent years has been very frustrated that the president and Congress talk about railways and roadways and runways but they never talk about the rivers," said Amy Larson, president National Waterways Conference.

"I am mindful that we are facing the fiscal cliff and as a nation we need to curtail spending," said Larson. But "we would be misguided not to continue to support our infrastructure."

Advocates for reform of the way the U.S. deals with inland waterways infrastructure has been building for years. Now the potential disaster-in-the-making tied to declining water levels along a 180-mile stretch of the Mississippi River could change a recalcitrant Congress, the advocates hope.

Even though the current low-water problem is not tied to failing infrastructure, it is underscoring how quickly financial losses can climb when river transportation slows.

"We have $9 billion of exports sitting on barges because they cannot get down the Mississippi River because of the drought," U.S. Trade Representative Ronald Kirk said on Tuesday.

"What we're seeing right now on the middle Mississippi really underscores the importance of this transportation artery to the nation," said Mike Toohey, president and CEO of Waterways Council Inc.(WCI), an advocacy group for barge operators and other companies that rely on river transportation.

Experts say about $8 billion in investment in 26 priority projects is needed to modernize locks and dams - many more than 50 years old - along the 12,000 miles of inland waterways critical for shipping crops, fertilizer, scrap, salt, coal and other bulk commodities.

No stretch is more critical than the Mississippi River basin, which accounts for 9,000 miles of navigable waterways. But now declining water levels along the river just south of St. Louis, Missouri, to Cairo, Illinois, is forcing barge tows to lighten loads or risk groundings.

The river and its tributaries draw on a region that produces 90 percent of U.S. farm exports, a key for the U.S. balance of trade. Sixty percent of grain exports go through New Orleans.

LONG TERM PROBLEMS?

U.S. barge operators have complained for years about improvements needed in river locks and dams to manage water flows and keep U.S. farm exports competitive with modernizing exporters like Brazil and Argentina.

An expansion of the Panama Canal, expected by 2015, means larger container ships and a need for deeper U.S. harbors to accommodate them, and inland waterways need new or rehabilitated lock and dam facilities to speed shipments to the ports.

"We just can't be seen as a fully reliable trade partner if our major supply chain is disrupted as it is now," said Toohey.

John Peabody, commander for the Mississippi Valley division of the U.S. Army Corps of Engineers, told a U.S. House committee in April that "major investments" were required for aging inland waterways. He cited 221 locks with an average age of 60 years showing signs of wear and tear.

"In a select few cases, the condition of a lock or dam has deteriorated to a point that catastrophic failure is a real possibility," Peabody told lawmakers.

Last year, a Lockport, Illinois, lock and dam facility south of Chicago saw a 280-foot section of a canal wall collapse, disrupting commercial navigation. Continued...