A logistical nightmare
Parts of the agricultural sector are experiencing the worst logistics problems in memory. Many in the trade, while acknowledging the impact of record crop production in Canada and the United States, strong exports and the most severe winter weather in years, are pointing fingers at increased competition for locomotives and engineers as railroads move huge volumes of shale oil from the Upper Midwest at the implied expense of grain, oilseeds, sugar and other agricultural products.
Logistics problems have been cited as contributing to historically high hard red winter wheat, hard red spring wheat and oats cash basis levels, recent gains in refined sugar prices and soaring freight costs.
“Beginning in October, a record corn harvest and strong soybean exports brought weekly grain car loadings to their highest point since January 2011,” the U.S. Department of Agriculture said in a recent Grain Transportation Report. “However, rail service disruptions, coupled with the ongoing high demand for empty grain cars, led to record high prices for available grain cars in October and December in the secondary rail car market as rail capacity became strained.”
Much of the focus has been on the BNSF Railway Co., the nation’s largest carrier and the major railroad serving the Upper Midwest and Southwest regions that have seen most of the delays in service, but sources also noted delays on other railroads in Canada and the United States.
“We haven’t met customers’ expectations for best-in-class service,” said John Miller, BNSF group vice-president, agricultural products, in acknowledging the service problems experienced by BNSF. “We are trying very hard. We will get there.”
Although there have been years when performance statistics were worse, Mr. Miller called this “a winter like no other,” especially in the northern agricultural sector where “it all came together so quickly” and cold weather has persisted for so long.
At what may have been the peak of the logistics problems in January, several flour mills and sugar refineries were forced to slow operations or temporarily close during a period of extremely cold and snowy weather. Severe cold slows switching activity and reduces the effectiveness of air brakes, forcing railroads to run more but shorter trains, which may add to congestion. While the most severe of those conditions appear to have eased, in part as grain millers and sugar factories added trucks to supplement slow rail shipments, the problems are far from over, and in some cases may have continued to worsen.
“All of the U.S. oats industry is on life support,” a prominent Upper Midwest oats miller said. Shipments of oats from Canada, the primary source of most milling oats for the United States, were normal until Dec. 1, 2013, the miller said, but since then, and especially in January and February, grain suppliers haven’t been given rail cars to load. Canadian growers have lots of oats to ship, elevators are full, and millers have bought millions of bushels, but the oats are not arriving. He said it appeared the railroad (Canadian National in this case) preferred to ship grain to the West coast (Vancouver, B.C.) rather than to the North American (U.S.) market.
“The last week or two, shipments have been nonexistent,” the miller said. “I never remember a time like this. If they decide not to ship, there’s not a lot you can do.”
A consultant who closely reviewed Canadian railroad statistics from the past several months agreed that grain shipments to the West coast were strong, but noted that much of the backlog in Canada may have been the result of slow grain vessel loading at those Pacific ports and maybe less the result of actual rail issues in other parts of Canada.
At the same time, railroad delays are expected to contribute to projected record high U.S. wheat imports of 170 million bus in the current 2013-14 marketing year, according to the U.S.D.A.
“Imports are raised 10 million bus (from January) as railroad backlogs and other logistical problems slow Canadian wheat shipments to Canadian Pacific Coast terminals and encourage additional shipments of hard red spring wheat into the U.S. market,” the U.S.D.A. said in its Feb. 12 Wheat Outlook. “Canada appears overwhelmed by the current logistical problems it is experiencing from exporting its record harvest.”
The two somewhat opposing views for Canada point to the complexity of the problem, which most surely is a combination of 2013 record wheat and canola production in Canada and record corn output in the United States, strong exports of wheat in both countries in addition to corn and soybeans in the United States, all further complicated by severe cold and in some cases heavy snow in January and February. But many in the agricultural sector contend crop size and weather only exacerbated existing rail logistics issues created by the railroads’ increased focus on moving energy products from areas not served by pipelines.
In late January, the American Crystal Sugar Co. slowed beet sugar production “sizably” in three of its five factories, according to a report in AgWeek, a regional publication of Forum Communications Co. American Crystal ships roughly 1 million tons of sugar by rail annually. Initially, the company was short of empty rail cars, according to AgWeek, and sugar storage silos were at capacity, which forced the slowdown in sugar production. Since then, traders indicated the availability of empty cars has improved but deliveries continued to be delayed, which has forced some of the company’s buyers to alternative sources on the spot market and contributed to a modest increase in bulk refined sugar prices the past couple of weeks. Sources at American Crystal said they have hired trucks to augment the slow rail shipments, which has eased the delays but deliveries remain far from normal.
While the full impact on logistics of large crops and cold weather may be difficult to quantify, the amount of grain, petroleum products and other commodities moved by rail is well documented.
In the 52 weeks ended Dec. 28, 2013, the Association of American Railroads (A.A.R.) reported 708,371 carloads of petroleum and products had been originated in the United States, for a weekly average of 13,623 cars, up 31% from 2012. The next largest weekly average percentage increase for the year was 6% for nonmetallic minerals and products. By comparison, 936,098 carloads of grain were originated during the same period, an average of 18,002 per week, down 8% from the prior year and largely reflecting the drought-reduced crop production in 2012.
Total rail traffic for North America showed a 24% increase in average weekly carloads for petroleum and products compared with a 4% decline for grain.
In a December 2013 report titled “Moving crude oil by rail,” the A.A.R. said, “Small amounts of crude oil have long been transported by rail, but since 2009 the increase in crude oil movements has been enormous. In 2008 U.S. Class I railroads originated just 9,500 carloads of crude oil. In 2012, they originated nearly 234,000 carloads and will likely originate around 400,000 carloads in 2013.”
And it’s not just crude oil and natural gas that requires additional rail resources, but also “frac sand” used in extracting crude oil from shale. Industrial sand shipments have increased from around 112,000 carloads in 2009 to near 375,000 in 2013.
“While it’s not possible to determine precise percentages, frac sand is almost certainly the primary driver behind the increased industrial sand movements on railroads over the past few years,” the A.A.R. said.
“Rail is not the most efficient way to move oil,” the oats miller said, citing the lack of more efficient pipelines in the shale oil areas.
“Much of the recent increase in crude oil production has been in North Dakota, home to the Bakken Shale formation,” the A.A.R. noted. Production increased more than 11-fold from 81,000 barrels per day in 2003 to 900,000 barrels in mid-2013. That area closely mirrors the heart of the Upper Midwest spring wheat and durum production region, and is just west of the Red River Valley, which is the largest sugar beet producing region in the United States.
“Following the 2012-13 harvest, A.A.R. data show railroads hauled the smallest amount of grain in over 13 years,” the U.S.D.A. said in its Feb. 6 Grain Transportation Report, with the BNSF Railway moving a record high 54% of the grain during the four-month period beginning in October 2012.
“Total grain car loadings for the major U.S. carriers are up 13% during the past four months, reflecting the record grain harvest, compared to the same period last year,” the U.S.D.A. said. But the U.S.D.A. also noted the share of grain carried by BNSF was down 12% during the latest four-month period, as the nation’s largest grain carrier originated the smallest amount of grain carloads since 2002.
“Persistent service problems have reversed BNSF’s market share,” the U.S.D.A. said. “Service problems started with track improvement work but were exacerbated by a record and compressed harvest, weather and tight capacity due to increased oil, intermodal, coal and automotive traffic.”
In addition to weather and record crop production, Mr. Miller said growth at BNSF across all four of its business sectors (domestic intermodal, coal, agricultural products and industrial products, which includes crude oil) “came in above expectations” and contributed to increased demand for rail service, while a record level of capital improvements ($4 billion in 2013) also affected service.
Grain car originations by other railroads have increased 52% from a year ago during the same time, with Kansas City Southern hauling a record amount, the U.S.D.A. said.
“Although this has alleviated some of the harvest pressures for rail, persistent high bids in the secondary railcar market indicate not all of the demand for rail service can be accommodated at this time,” the U.S.D.A. said.
In its Jan. 9 Grain Transportation Report, the U.S.D.A. said, “A new record was set in the secondary railcar market with an average of $2,833 per car for shuttle service on BNSF Railway. This follows the previous record highs for BNSF shuttle service — $2,825 a month ago and $2,517 in October. Payments in the secondary railcar market are in addition to BNSF shuttle tariffs and fuel surcharges, which currently total between $4,000 and $6,000 per car on key grain routes. In addition, some shippers are finding that even with the high premiums, they must still wait 3 to 5 days for their loaded grain cars to be picked up by the railroad. There are some complaints that sufficient locomotives are not available to haul grain because they are being used to haul crude oil from the growing shale oil business instead.”
It should be noted that rail resources have been dramatically declining for movement of coal, which still commands the largest share of carload originations (21% for the 52 weeks ended Dec. 28, 2013) other than intermodal units (47%), which have soared in recent years. Coal carloads originated in 2012 were the lowest since 1993, with further declines seen in 2013, according to A.A.R. data, although there were exceptions.
“Over the past few years, the decline in coal carloads has far exceeded the increase in carloads of crude oil and frac sand for U.S. railroads,” the A.A.R. said.
Meanwhile, the railroads are attempting to address the logistics issues both short term and longer term.
“We’ve steadied the challenge,” Mr. Miller said. “We’re fighting through the weather and working to bring service back to best-in-class level.” Although he couldn’t put a time frame on that progress due in part to the unpredictability of weather, which has slowed the recovery, he said the railroad expected to “see continued gradual improvement over the course of the year.”
BNSF on Feb. 4 said it planned a record $5 billion in capital commitments for 2014, up $1 billion from 2013.
“BNSF loaded more than 50% of the volume increases for the rail industry in 2013,” the company said. Those increases included 11% in industrial products led by crude-by-rail, 8% for domestic intermodal, 3% for coal and a fourth-quarter surge in agricultural products. The investments include $2.3 billion for core network and related projects, $1.6 billion for locomotive, freight car and other equipment and $900 million for terminal, line and intermodal projects.
But some agricultural shippers aren’t convinced even that huge investment will be enough with one trader noting locomotive and freight cars still have to be built. And some grain shippers are concerned about the long-term effect of crude oil on rail performance and locomotive availability for agriculture.
“We’re going to keep having large crops,” one Upper Midwest grain trader said. “What’s going to change down the road?”
It may take legislative pressure in Ottawa and Washington to force railroads to provide better service to the agricultural community, the oats miller said.
“I know railroads are private business, but they’re about to get more regulated,” he said.