Agricultural shippers wary as fall harvest progresses

by Ron Sterk
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Agricultural markets are approaching the winter with considerable trepidation about railroads’ ability to transport expected record large corn and soybean harvests in a timely manner and about the availability of trucks to help pick up the slack when the railroads fall short. What is certain is costs to ship agricultural commodities by all modes will be higher this year than last, except for ocean freight.

While the agriculture sector depends on trucks, railroads, barges and ocean freight to move raw commodities as well as milled and processed products, railroads continue to be the focus because that is where the bottlenecks typically occur and certainly have been most critical in the past year, despite massive efforts by the railroads and some government intervention to improve service. Trucks are most efficient and move the vast majority of grain within 250 miles of origin with railroads the major carrier and more efficient for longer distances. Barges move the majority of grain to ports for export via river systems, with railroads also a major carrier of export grain.

It was early last fall that rail service issues began to surface, coming on the heels of lower crop production the prior year that limited grain transport issues. Key causes arguably included heavier volume of coal, crude oil and intermodal rail shipments, with surging crude oil shipments from the Bakken shale oil region in North Dakota often singled out as the major culprit. Demand for grain transportation also ballooned as the 2013 Canadian wheat and U.S corn harvests came in record high. The final blow was severe winter weather that slowed rail transport and resulted in abysmal performance in which cars were weeks and even months behind schedule. And there is more grain to move this year.

The U.S. Department of Agriculture in September said U.S. production of corn, soybeans and wheat was expected to be a record 20.3 billion bus in 2014, with grain prices down 15% to 30% from last year. Combined exports are expected to decline 8% from 2013-14, taking some pressure off transport needs to move grain to Gulf and Pacific Northwest ports, and reducing demand for ocean freight. Combined corn and wheat domestic demand is forecast higher than last year and exports lower due to ample global supplies of both grains. Domestic use and exports of soybeans, meanwhile, both are forecast record high.

“According to U.S.D.A.’s modal share analysis, increased domestic demand is likely to increase demand for trucking services and increased soybean exports are expected to increase demand for rail and barge service,” the U.S.D.A. said. “Adequate river levels should help barge grain movements, although at higher costs. Ocean freight rates are expected to remain low, and lower diesel prices could moderate truck rate increases that typically occur during harvest.”

Demand to secure rail and barge freight have driven prices to record highs, in part as grain shippers compete to lock in freight out of fear cars and barges may not be available during the peak corn and soybean harvest period of October and early November.

Rail performance still greatest concern

While railroads have spent millions this year and billions of dollars in recent years on tracks, locomotives, crews and other improvements, the agricultural industry seems to be in a “we’ll believe it when we see it” mentality, and rightly so since this year’s corn and soybean crops are forecast even larger than in 2013. Demand for grain transport likely will continue to increase while other demands for rail service also have grown and are not expected to ease, with the exception of coal, which still is by far the largest commodity moved by rail.

Total year-to-date rail carloads through Sept. 27 were 21,400,153, up 4.4% from the same period last year, according to data from the American Association of Railroads. Coal shipments of 4,355,030 were down slightly (0.1%), while all other categories were up for the year, with double-digit gains for grain at 767,744 carloads, up 17.7%, and petroleum at 590,333 carloads, up 12.5%. The single largest use of rail is for intermodal (containers loaded on flatbed railcars) shipping, with the year-to-date total at 10,077,330 units, up 5.5% from last year and equal to 47% of total carloads.

In its Oct. 2 Grain Transportation Report, the U.S.D.A. attempted to quantify the impact of rail service delays.

“The current rail service problems have exceeded previous events in magnitude and duration, including Hurricane Katrina, which caused major disruptions throughout the entire agricultural transportation network,” the U.S.D.A. said. “Typical unexpected shifts in demand and supply have lasted less than 20 weeks before they were resolved, with the exception of Hurricane Katrina, which took roughly 28 weeks. In contrast, the current rail service problems have extended over twice as long — about 58 weeks — with no end in sight.

“Average bids in both the shuttle and non-shuttle secondary railcar markets were at record highs this week (ended Sept. 25). Until railroads are able to increase the supply of rail service to grain shippers through capacity expansion projects or other innovations, prices in the secondary railcar market are likely to remain at historic levels, indicating inadequate rail transportation options to meet current demand.”

The U.S.D.A. said for the week ended Sept. 25 the average secondary railcar bid/offer per car of $4,625 above tariff (shuttle trains) for October was up $1,200 from a week earlier and up $3,613 from a year ago and at its peak. Shuttle train bids/offers for November were $3,100 per car above tariff, up $1,550 from last year and also at their peak.

Higher rail freight costs have been a key factor in boosting cash wheat basis at delivery locations, with the basis on the benchmark 14%-protein hard red spring wheat in Minneapolis briefly soaring above $6 a bu in September and doubling the price of wheat. The higher basis and freight costs may have added nearly $2 a cwt to the price of some grades of flour, according to a source at a major baking company. Grain mills are affected by higher costs to get grain to their facilities and to ship out bulk milled products and byproducts.

Rail freight delays and higher rates have added as much as $2.50 a bu to the cost of grain, with some of the highest costs noted in North Dakota, grain industry sources said. At the same time, higher freight costs have pushed prices paid to farmers lower.

Jim Peterson, marketing director for the North Dakota Wheat Commission, said wheat prices in the country were about 50c a bu below the Minneapolis December futures price and farmers were being paid as much as $1.50 a bu less for their wheat than they otherwise would be paid because of high freight rates. At the same time, elevators were seeing $2 to $2.50 a bu added to costs because of rail freight issues, he said.

Record high freight costs aside, there is just as great a concern about availability and performance of rail freight transportation for the agricultural sector.

The Surface Transportation Board, which oversees the railroad industry, held hearings and meetings in April and later in the summer. The S.T.B. in the spring ordered the BNSF Railway, the largest U.S. railroad, and the Canadian Pacific Railway to report fertilizer shipments to facilitate spring planting, and subsequently required both to report certain grain shipping metrics weekly. Some in the industry, as well as elected officials from the most-affected states in the Upper Midwest, have sought greater government involvement and transparency by railroads. So far the U.S. government has limited its involvement, unlike the Canadian government, which earlier in the year imposed hefty fines on two major railroads in Canada if grain shipments fell short of specific volumes. Canada’s actions actually exacerbated problems in the United States as the railroads there focused on east-west grain movement at the sake of southern movement to the United States, according to trade sources. The impact appeared to most affect milling oats, of which U.S. mills depend in large part on Canadian supply.

There have been contradictory statements concerning expected railroad performance this fall. The U.S.D.A. in its Grain Transportation Report said the BNSF told the S.T.B. in its fall service letter that customers could expect improvements in service going forward and that it planned to run a record number of shuttles to accommodate this year’s harvest. The Canadian Pacific in its fall service letter said it was current with customer demand and would have older grain car orders cleared by Oct. 1, with the possible exception of North Dakota grain orders.

At the same time, the U.S.D.A. said:

“Railroads have indicated the network is unlikely to recover until 2015 or 2016. Some shippers expect service problems to worsen as soon as the railroads are hit with the demands from this year’s harvest. BNSF and CP’s latest weekly status updates to the S.T.B. show the rail backlog has not gone away and has even started increasing again for BNSF.”

In his Oct. 3 podcast, John Miller, group vice-president, agricultural products, BNSF, said BNSF was repositioning its shuttle fleet from the South and East to the North to better handle the fall harvest, but also noted that non-shuttle delays always gradually rise during harvest season. BNSF turns per month were 2.1 overall and 2.0 for the Pacific Northwest, which were lower than average because of mechanical and loading issues at one port and rain-delayed harvest. He said turns were expected to rebound as the shift in the fleet was completed. BNSF past dues totaled 4,157 cars as of Oct. 3 and averaged 9.3 days late, Mr. Miller said. Most severe was North Dakota with 2,845 past dues and 9.9 days late.

“We are much more capable to handle demand this year than last year, and we expect our grain volume over the next few months to reflect that,” Mr. Miller said.

It should be noted the BNSF is the only railroad that publicly updates performance weekly, unlike other railroads that have been berated for their lack of transparency.

Truck demand record high

While additional trucks have been sought to ease rail delays, they are far from being the solution to the problem. Shipping by truck is more expensive, and trucks typically are used mostly for local or short haul needs. In addition, there is a general lack of trucks and drivers, especially during the peak of harvest. Grain merchandisers in Central states and the Southwest have noted truck and driver shortages for moving millfeed and other products well before row crop harvest was at its peak.

Trucks are especially important for the ethanol industry, with refineries typically drawing much of their corn supply locally, which requires trucks. Although profit margins for ethanol plants have been declining, production remains profitable and demand for lower-priced corn strong. The U.S.D.A. projects 5,125 million bus of corn will be used by the ethanol industry in 2014-15, unchanged from 2013-14 and equal to about 36% of total corn production. Outgoing shipments of ethanol and byproducts, especially large volumes of distillers dried grains, require significant truck and rail freight.

The American Trucking Associations’ advanced seasonally adjusted for-hire truck tonnage index (for all types of freight) for August was 132.6 (2000=base), up 1.6% from July 2014, up 4.5% from August 2013 and the highest on record for any month, indicating strong demand for truck freight. The A.T.A. expects moderate tonnage growth for the remainder of the year as the economy continues to improve.

Barge freight rates hit record highs

While not experiencing the same performance issues as railroads, demand for barges ahead of the expected record large fall harvest has pushed freight rates higher, not unlike rail freight costs. Year-to-date grain barge tonnage was 30% above the three-year average and the highest since 2010, with the total as of Sept. 13 equal to last year’s annual amount, the U.S.D.A. said.

“With the anticipation of the upcoming record corn and soybean harvest, grain barge rates for this week are at unprecedented highs, with spot rates ranging from 883% to 1,100% of the benchmark tariff,” the U.S.D.A. said in its Oct. 2 Grain Transportation Report. “It is too early in the harvest to know how much barge rates will escalate or retreat from current levels.”

Barge freight rates to move grain to the U.S. Gulf from the lower Mississippi river as of Sept. 30 were $33.50 per ton, up 19% from the prior week, up 86% from a year ago and 99% over the three-year average. The rate from the upper Mississippi river to the Gulf was $54.66 per ton, up 16% for the week, up 45% for the year and 54% over the average, the U.S.D.A. said. On the lower Illinois river, southbound barge freight cost $49.51 per ton, up 29% for the week, up 79% from last year and up 91% from the three-year average.

“Barge service in the Minneapolis-St. Paul area (upper Mississippi river) usually closes by Thanksgiving due to the beginning of ice accumulations,” the U.S.D.A. said. “Barge availability and high rates may be a concern in this area, especially if there is a delayed harvest and earlier-than-normal freezing temperatures.”

Ocean freight, diesel prices lower

If there is a “bright” spot for grain shippers, it would be ocean freight as increasing fleet sizes continue to outpace demand. New orders for Panamax vessels, the type usually used to ship grain, are on a record pace with the fleet size growing 9% annually, according to the U.S.D.A.

The cost of shipping bulk grain from the U.S. Gulf to Japan during August was $43.20 per tonne, down 24% from January, down 5% from a year ago and 18% below the four-year average, the U.S.D.A. said. The cost to ship grain from the Pacific Northwest was $24.05 per tonne, down 15% from January, down 2% from last year and 17% below the four-year average.

“Ocean rates for shipping bulk commodities, including grain, are currently low and are likely to remain moderate during the fall harvest,” the U.S.D.A. said.

Another factor not contributing to higher grain transportation costs this year is fuel prices. The U.S. average on-highway diesel price as of Oct. 6 was $3.733 per gallon, down 16.4c, or 4%, from a year ago, according to the Energy Information Administration of the U.S. Department of Energy. The U.S. average diesel price is used by railroads to determine fuel surcharges, which are added to freight rates and passed on to shippers. While the trucking industry also adds fuel surcharges, the amount generally is determined by individual companies and is not uniform.

With corn, wheat and soybean prices down sharply from a year ago and near four-year lows, many farmers may opt to store grain rather than sell it immediately, or some may be forced to store grain due to the lack of shipping options. It’s known that farmers have been adding storage capacity in recent years, but it’s also known (based on U.S.D.A. data) that on-farm capacity, as well as off-farm space, still is inadequate to hold this year’s expected record corn and soybean crops. That means huge amounts of grain (mainly corn) will have to be “stored” in piles on the ground, and that is what producers and elevators are most anxious to move to avoid weather damage and quality loss, which occurred with increased frequency in the past season.

It will be weeks and months before the markets know how the various modes of transportation, especially rail, will perform this season, with much depending on the severity of winter weather. In the meantime, the agriculture industry will hope for the best amid what one trader called a general sense of fear about freight markets this winter. And the industry realizes shipping problems won’t end next spring. One baking executive said he sees the rail issue as “not going away quickly,” but rather requiring a three to five year solution.

Go to www.bakingbusiness.com to see recent related stories: Transportation proposal under scrutiny (8-14-2014); Rail performance issues taking toll on grain industry (8-13-2014).
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