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KANSAS CITY — Rail performance has improved from abysmal levels in the United States and Canada earlier in the year, but logistics for agriculture in general and grains and grain products in particular, including flour, remain highly problematic in some key regions with slow deliveries and high costs running through the spring and into the summer. And with bumper fall harvests expected across the Corn Belt and Upper Midwest, concern about rail car availability during harvest is driving freight values into the stratosphere.

The milling industry has clearly felt the effects of rail logistics problems, from delayed inbound shipments of wheat to outbound flour and millfeed movement, which has affected cash grain basis levels, operating schedules, grain and flour prices, profit margins and earnings, in some cases since last fall.

“There is no question it’s increasing costs,” said Jeff Zyskowski, vice-president of supply chain at Ardent Mills, Denver. “It affects everyone in the supply chain.”

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Mike Miller, vice-president of risk management at Ardent Mills, added, “Any time you have inefficiency and unpredictability it’s going to add costs.”

Jay O’Neil, International Grains Program senior agricultural economist at Kansas State University, said the high expectations for big fall crops are getting everyone worried.

“Currently, October-November car costs in the secondary car market are about the equivalent of $1 per bu,” he said. “This is definitely going to impact commodity cost. In a supply push market I expect the majority of this extra cost to be passed back to the farmer, who is already unhappy with lower futures market values.”

Grain companies have three options to source railcars, beginning with ownership of their own cars, which many do, but they still need locomotives, crews and tracks from the railroads. Freight on the primary market is purchased directly from the railroad that will supply the car. Some railroads, such as the Burlington Northern Santa Fe Railway, the nation’s largest grain mover, hold auctions to sell freight or access to their railcars. In the secondary market the freight is purchased from another party, not directly from a railroad.

“Bids in the primary railcar market have been trading at historic highs since late May for guaranteed railcar placement for grain shipments in August, September and October,” the U.S. Department of Agriculture said in its July 24 Grain Transportation Report. “Shippers are worried about a repeat of last year’s rail service problems during the upcoming harvest and are securing space directly from rail carriers this year.”

The U.S.D.A. said bids for the week ended July 17 ranged between $2,700 and $3,200 per car for BNSF Railway’s guaranteed grain car placement in September and between $2,800 and $3,000 per car for placement in October, which was in stark contrast to the prior 10 years when there was “very little” monthly trading and bids rarely exceeded $700. And trade sources have indicated costs approaching $4,000 per car in some cases.

The difference between a $3,300 car and a $700 car equates to a premium of about 70c per bu of grain in additional shipping costs, based on a 3,700-bu hopper car. An additional 70c per bu of wheat may add as much as $1.75 per cwt to the price of flour, based on standard industry calculations.

Traders were reluctant to estimate how much logistics problems have added to the price of a hundredweight of flour because the amount varies daily, but they are confident it has affected costs throughout the supply chain. Millers have, not infrequently, needed to scramble to find alternative and expensive transportation to ensure customer supplies are not disrupted. What had been a rare opportunity to demonstrate exceptional customer service has become a commonplace occurrence necessary to avoid major problems.

Prices for spring standard patent flour were $19.95 a cwt on July 25, up $2.40 a cwt, or 14%, from a year earlier. Minneapolis September wheat futures prices on the same date closed at $6.27¾ a bu, down $1.08¾ a bu, or 15%, from a year earlier. The spring wheat cash basis level (delivered Chicago) was $1.75 to $2.50 a bu over the Minneapolis September future, more than double the 80c to $1 over last year. Traders largely attribute the higher cash basis levels at delivery points to an offset for higher freight costs, although sharply lower millfeed credits than a year ago also have contributed to higher flour prices.

“Basis levels remain firm on the delivered side of the market as (rail) car costs continue to escalate,” said Joe Christopher, Crossroads Commodities, Sidney, Neb. “Basis levels continue to weaken in the country as country elevators struggle to absorb part of the car cost and maintain margins. If the futures work much lower, producer selling will dry up. Producers are seeing their prices fall quickly as the board and country basis falls to accommodate railcar costs.”

The most acute rail logistics problems last winter were in Canada, the Upper Midwest, the Chicago gateway and the Northeast, according to trade sources. Rail performance remains below par in those areas, but has shown improvement. Greater improvement has been seen across the hard red winter wheat region of the Southwest, in part the result of this year’s subpar wheat harvest. Earlier this year the Canadian government ordered that nation’s two largest grain shipping railroads to meet specific shipping levels and make regular reports on progress. Those efforts resulted in improved rail performance but have not completely solved all the problems, trade sources in the Upper Midwest said. But railroads note significant progress in Canada.

“By virtue of normal commercial incentives, the grain handling and transportation system is now fully back in sync and ready to accommodate the upcoming harvest,” said Claude Mongeau, president and chief executive officer of Canadian National Railway. The carryover from last year’s crop will be eliminated by next spring, he said.

There have been some attempts at increased government involvement in the United States as well. The Surface Transportation Board on June 20 ordered the BNSF Railway and Canadian Pacific to file plans to resolve grain car backlogs and issue weekly reports that include total late cars and average length of delays. Senator John Thune of North Dakota and Senator Heidi Heitkamp of North Dakota have suggested the railroads make additional data public. Ms. Heitkamp wants Canadian Pacific to provide more information about shipment delays in North Dakota. The BNSF already provides weekly podcasts of certain performance measures and delays for the agricultural areas it serves. As of July 25 BNSF had 5,182 cars past due with an average-days-late of 22.2, with 3,230 of those cars in North Dakota with an average-days-late of 24.1.

“Across our network BNSF is seeing service improvements, with several indicators showing that traffic movement is becoming more fluid,” said Amy Casas, director of corporate communications for BNSF. “We have met with numerous groups and associations in the past five months and listened to their feedback. We continue to see improved performance in Ag metrics, including our past due orders and velocity. We have made significant progress on reducing past due orders and will continue to greatly reduce the total number that now stands around 4,000 cars. Our plan is to spot 450 cars per day, and combined with new orders coming in, should result in a reduction to less than 2,000 past due cars by mid-September. We expect substantial volume improvements as we will offer more shuttles and railcars this fall than we did in 2013 and our performance will be better than it was last year.”

 As demand increased last year, Ms. Casas said BNSF made an industry record capital investment of $4 billion to improve its network and expand capacity, particularly in the Northern region of its network to handle growth. The railway also announced a new record 2014 capital plan of $5 billion in early February, with the largest portion of the expansion and maintenance capital again being made in the Northern Corridor.  The investments are expected to benefit all of the railway’s customers and ensure long-term ability to handle future growth, she said.

“Adding rail capacity takes time and adding capacity under increased traffic potentially decreases velocity,” Ms. Casas noted. “We will manage these windows as best we can and anticipate less disruption than last year.”

In the United States, it’s generally accepted that the severe rail performance problems resulted from a combination of last fall’s large grain crop, large increases on rail demand to ship crude oil from the Bakken oil shale region in North Dakota and the severe winter. Spring wheat and soybean crops and possibly the corn crop are expected to be even larger this year.

The railroads acknowledge the severity of the problem and have stepped up spending for new locomotives, hiring and training more crews and improving rail lines. But many in the trade also doubt the railroads’ ability to fix the problems by this fall. And they generally don’t see additional regulation as the answer to rail logistics problems in the United States.

“If you sit down with railroad representatives, they’ll tell you they are getting caught up, that they anticipate being caught up by September or October,” said one grain trader who did not want to be identified. “But the market’s perception is that they won’t be. It’s improved from last winter, but they were so far behind it’s tough to ever feel like they caught up. There’s just general fear in the grain community about freight availability.”

Mr. Miller called the situation “the new norm.”

“In the past you could make predictions about turn times and (railroad) performance and you would be pretty accurate,” he said. “In today’s world, you really don’t know.”

Mr. Miller, Mr. Zyskowski and Mr. O’Neil agreed that rail logistics problems won’t be fixed anytime soon. As a result, communication throughout the supply chain has become more critical.

“You have to work very closely with your suppliers and buyers,” Mr. Zyskowski said. Ardent Mills has had “lots of meetings” with senior management of the railroads, as have other grain and milling companies, he said.

“The railroads are aware of the problem,” he said. “They want to fix it.” But the fix obviously isn’t quick or easy.

“The majority of freight goes through Chicago,” Mr. Zyskowski said. “That’s primarily where the inefficiency is.”

The U.S.D.A. in a recent Grain Transportation Report shed light on the much-talked about Chicago gateway:

“Chicago is the busiest rail hub in the United States, but for many years has been plagued by rail congestion and long interchange times between railroads. Six of the seven largest railroads in the United States interchange in Chicago,” the U.S.D.A. said. Those railroads own the Belt Railway, which allows railroads to interchange rail cars with every railroad in the 
Chicago area.

“Most of the grain passing through Chicago is corn and wheat,” the U.S.D.A. continued. “There is a large difference between the quantity of grain arriving by rail and the quantity dispatched out of Chicago.” The disparity is mostly due to the proximity of Chicago to farmland with grain brought into Chicago by truck and shipped out by rail. The disparity has been increasing since 2000. The Chicago region is one of the top five grain elevator capacities in the United States.

The most common rail destinations from Chicago are West coast ports for export, Texas feedlots, Northeast flour mills and the Illinois river for barge loading to the Gulf for export.

Attempts to relieve rail congestion in the Chicago gateway and other areas by using more trucks has had only minimal effect, mainly because trucks are too costly to move grain long distances. In addition, some mills and most export facilities can accommodate only railcars, not trucks.

“Today, the industry has in the range of 30,000 to 35,000 unfilled truck driver jobs,” said Bob Costello, senior vice-president and chief economist for the American Trucking Associations. “As the industry starts to haul more because demand goes up, we’ll need to add more drivers — nearly 100,000 annually over the next decade — in order to keep pace.”

It should be noted that grains and flour are not alone in feeling the effects of subpar rail performance. Anecdotal accounts are plentiful from coal to sugar. Shipments of beet sugar were slowed dramatically last winter and still are not normal, according to sources in the key Red River Valley, the largest sugar beet growing region in the country. In nearly all cases processors and refiners hired additional trucks, as have flour mills, but were unable to fully offset the rail delays.

And it’s not just rail. Barge rates on the Mississippi river have doubled in the past few weeks in anticipation of the fall harvest and as shippers seek alternatives to tight and high priced rail freight. While ocean freight generally has remained a good value because of excess capacity, loading facilities at U.S. ports are being strained to capacity.

“September-December Gulf export capacity is booked up,” Mr. O’Neil said. He said some paying higher prices for vessel loading space have been turned away because no space was available.

There’s clearly a sense of trepidation in the grain industry concerning logistics, especially for rail, ahead of the fall harvest and winter. Especially worrisome was the improvement in rail rates and performance in the early spring that has since, rather quickly, gone away.

“Any slight hiccup is not easily fixed because of volume and the taxed infrastructure,” Mr. Miller said. But trade sources also agreed that, unlike last winter, the market will not be caught off guard, even if the problems cannot be fixed.