Fall grain harvest expected to stress shippers only moderately
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Railroads and other modes of transportation are eagerly awaiting a record-large fall corn harvest as well as large soybean and sorghum crops after drought-reduced production in 2012 and generally moderate weather last winter resulted in excess capacity and relatively few shipping challenges over the past year. Increased demand around harvest has pushed shipping costs higher, but factors such as lower grain prices and increased storage capacity are expected to mitigate some of the shipping stress this year.
Click to enlarge: Grain move by rail in 2012.
“The market is expecting, and hoping for, an active harvest period,” said Jay O'Neil, senior agricultural economist for the International Grains Program at Kansas State University, owner of O'Neil Commodity Consulting and a featured presenter at this year’s Sosland Purchasing Seminar in June. “But just how tight and expensive transportation will get is still an unknown, and there are weather related and market related issues that can change things in a hurry.”
Mr. O'Neil said he expects “a brief period of logistical tightness in mid to late October, but that it will not be protracted into mid-November or forward.” He noted some grain shippers who ordered barges and rail cars earlier have delayed them because of the later-than-usual corn and soybean harvests in the Midwest.
Significant increases in on-farm storage the past couple of years, with capacity at a record high, also has negated some of the usual demand for extra transportation around harvest, especially with the recent drop in prices, mainly for corn, which was trading at three-year lows in early October. Although there have been no updates in corn and soybean harvest numbers from the U.S. Department of Agriculture since Sept. 29 due to the federal government shutdown, trade “guesses” placed corn and soybean harvests at around 20% to 25% complete as of Oct. 6 in key states. That’s about a week behind average for the date and well behind last year’s early but smaller crops.
Click to enlarge: U.S. rail traffic.
Still, rail and barge rates have shot up in the past couple of weeks as the harvest advanced. Barges were trading at about 600% to 615% over tariff, and extra rail cars were available only on the secondary market (not directly from railway companies) at $1,000 or more premium for October, Mr. O'Neil said. A few weeks ago barge rates were closer to 250% over tariff and there was no “mark-up” for rail cars, with discounts even noted in some cases.
“You can’t build a church for Christmas or Easter,” Mr. O'Neil quoted a railroad colloquialism, meaning logistics “normally” get tight and difficult during the “gut slot” of harvest periods because it’s unreasonable to build fleets — either rail or barge — for maximum demand only to have excess capacity sitting unused most of the year.
Representatives from railroad companies, grain shippers and allied industries discussed this fall’s crop and transportation situations during a session of the National Grain Car Council meeting in Kansas City in September in conjunction with the Transportation, Elevator and Grain Merchants Association. Rail company spokesmen, both from Class 1 and shortline railroads in the United States and Canada, indicated they had prepared for the fall harvest with pre-placement of rail cars and increased numbers of covered hopper cars, locomotives and engineers.
“We’re ready to carry your grain,” one rail company representative said at the meeting, a sentiment that was echoed from the other railroads as well. In fact, representatives of both railroads and grain companies indicated they would welcome the potential stress and delays that a large harvest may bring after last year’s drought-reduced crops that had transportation needs well below capacity levels.
Already this fall there have been some unexpected twists including the aforementioned government shutdown over the budget battle in Washington and a surprise heavy snowstorm across some northern areas of the United States. It was hoped those were not a harbinger of things to come, although some long-range forecasts have called for a difficult winter ahead, which may affect rail and truck movement of grain as well as the length of the barge season before ice closes river channels. Despite the advanced preparation, sources at some Midwest country locations noted recent delays in rail traffic, which they mostly attributed to lingering track maintenance since the harvest had yet to reach its peak.
While the government shutdown doesn’t affect what farmers are doing in the field or what various modes of transportation are doing to move the fall harvest, the lack of information from the U.S.D.A. has somewhat handcuffed the market. The shutdown has curtailed data ranging from weekly crop progress (harvest), grain export sales, inspections and exports, grain transportation and much more. Perhaps most critical was the delay in the Oct. 11 U.S.D.A. World Agricultural Supply and Demand Estimates and Crop Production reports, all of which adds up to traders making less informed decisions.
What is known is that the U.S.D.A. in September forecast a record large corn crop, the fourth largest soybean crop and a significantly larger sorghum crop than in 2012. Anecdotal reports have indicated yields for both corn and soybean crops above expectations in many areas, which in early October had some private forecasters raising corn and soybean production forecasts, including pushing the soybean crop to the largest ever in some cases, which may mean even greater stress on the nation’s grain storage and transportation systems this fall.
Memphis, Tenn.-based private forecaster Informa Economics on Oct. 4 forecast U.S. 2013 corn production at a record 14,010 million bus with a yield of 158.8 bus an acre, both above the September U.S.D.A. forecasts of 13,843 million bus and 155.3 bus an acre. Informa forecast U.S. soybean outturn at 3,176 million bus with an average yield of 41.7 bus an acre, still the fourth largest crop on record but above the U.S.D.A. September forecasts of 3,149 million bus and 41.2 bus an acre. Although the Informa numbers are just one of many private forecasts, several put the corn number at 14,000 million bus or above. The previous corn production record was 13,092 million bus, and the soybean record was 3,359 million bus, both in 2009.
But Mr. O'Neil noted that the latest U.S.D.A. corn and soybean estimates were below forecasts earlier in the season, which will allay some of the stress on shipping during the harvest period.
“Even though we have a bigger crop this year, it is not a ‘bin buster’ crop, and I don’t anticipate that we will witness the types of big logistical problems we’ve seen in past years,” Mr. O'Neil said, noting that the rebuilding of inventories as well as increased on-farm and commercial storage also would mitigate shipping volume.
The first signal of a large harvest comes to the truck market. Throughout the year trucks are the primary mover of corn to ethanol facilities, which are expected to utilize 4,900 million bus, or about 35% of total 2013 U.S. corn production. In any given year, trucks account for about 60% of the total grain moved, railroads about 30% and barges about 10%. Trucks have the largest share of corn and
soybeans while railroads have the largest share of wheat, according to the Association of American Railroads.
Truck availability has been a problem since the corn harvest began in the South in late August moved into the Corn Belt states in mid-September. Millfeed traders noted a lack of trucks, and in some cases, the lack of drivers, throughout September and into October, especially in the South and Southwest. Trucks were left sitting at mills because drivers were unavailable at times.
Although there are special exemptions for agriculture that widen truck driver availability at harvest, the trucking industry has faced a growing shortage of drivers for years as the type of work has failed to attract enough young drivers to replace those reaching retirement age, especially in the long-haul or “over-the-road” segment of the industry. Adding to the limited availability of truck drivers has been increased restrictions on hours of service, which was seen as a safety issue. The U.S. Department of Transportation published the Hours of Service of Drivers Final Rule on Dec. 27, 2011, with an effective date of Feb. 27, 2012, and a compliance date of remaining provisions on July 1, 2013. A U.S. Court of Appeals upheld the rule in a decision in August.
But the American Trucking Associations noted the second-quarter 2013 annualized turnover rate of 99% at large truckload fleets was exacerbated by the new D.O.T. hours-of-service rules.
“Continued high turnover shows that the market for qualified, experienced drivers remains extremely tight,” said Bob Costello, A.T.A. chief economist. “The continued improvement in the freight economy, coupled with regulatory challenges from the changing hours-of-service rule … will only serve to put a further squeeze on the market for drivers. A tight market for drivers will push costs higher for fleets as they work to recruit or retain quality drivers.”
Truck tonnage overall (mostly freight) has been increasing, which often is seen as a leading indicator of a strengthening economy. The A.T.A.’s proprietary monthly tonnage index advanced from July at a seasonally adjusted rate of 1.4% in August after falling 0.6% in July. The index has increased in three of the past four months (through August). The August gain was the largest since May and was up 6.9% from August 2012, the A.T.A. said.
“Truckload industry loads have accelerated the last few months, but are flat for the year, while less-than-truckload shipments are up less than 1.5% in 2013,” Mr. Costello cautioned.
In addition to increased demand, trucks have benefited from modestly lower diesel fuel prices in recent weeks. As of Oct. 7 the average U.S. on-highway diesel price was $3.90 a gallon, down 26c, or 6%, from near five-year highs in early March and down 20c, or 5%, from a year earlier, according to the U.S. Energy Information Administration of the U.S. Department of Energy. The government has continued to collect and release energy data during the shutdown. The E.I.A. forecasts on-highway diesel prices will average $3.93 a gallon in 2013, down 4c from 2012, with the average expected to fall to $3.76 a gallon in 2014.
Fuel prices above defined levels are passed on to shippers in the form of surcharges. Anecdotal reports from truckers indicated fuel surcharges as high as 50c a mile or slightly more in September in the Midwest. Fuel surcharges for trucks are determined by individual trucking companies, may vary widely and are not tracked on a national scale.
Fuel surcharges for railroads also use the E.I.A.’s on-highway diesel price, based on a lagging monthly average, and are either mileage or rate based. While not all railroads make their fuel surcharges available to noncustomers, the Union Pacific Railroad surcharge will be 38c per car per mile in November, up 1c from October but down 3c from a year ago, as an example. For a 110-car train traveling 1,000 miles, a 38c surcharge would total $41,800.
Railroads have seen a number of changes in recent years, including a reduction in their largest bulk commodity — coal — as use of coal-fired power plants comes under increased scrutiny. At the same time, there has been a surge in crude oil moved by rail with the rise in production from oil shale areas such as the Dakotas, which are not served by traditional oil pipelines.
Grain rail car loadings plummeted this year due to the smaller 2012 crops. Railroads are primary carriers of grain to river terminals where the grain is reloaded onto barges, as well as directly to export ports in the Gulf and the Pacific Northwest. In the 39 weeks through Sept. 28, loadings totaled 652,385 rail cars for grain, down 15% from the same period last year, with 17,345 cars loaded in week 39, down nearly 20% from the same week last year, according to data from the A.A.R. Carloads of petroleum and petroleum products, meanwhile, totaled 524,766 cars for the 39 weeks, up nearly 37% from last year. Carloads of coal in the first 39 weeks of the year totaled 4,360,566 cars, down 4% from a year ago. Intermodal traffic remains the “star,” though, with year-to-date loads at 9,547,764 cars through Sept. 28, up about 4% from the same period in 2012, according to the A.A.R.
Of the 10 major commodity categories reported by the A.A.R., grains had by far the largest year-to-date decline from 2012.
“Those who follow the rail industry know that carloads of grain and coal can rise and fall by substantial amounts for reasons that have little or nothing to do with the state of the economy,” said John T. Gray, A.A.R. senior vice-president of the A.A.R. “Not so with most other rail traffic categories, however. The fact that rail carloads excluding coal and grain were up 4.9% in September — the biggest year-over-year monthly gain since last December — is a hopeful sign.”
Total U.S. rail traffic in the first 39 weeks was up just over 1% from the same period last year. Canadian
year-to-date rail traffic totaled 5,143,663 cars, up 2.6% from last year, and Mexican carloads totaled 987,731 cars for the year, up 4.9%, the A.A.R. said.
In its September WASDE, the U.S.D.A. projected combined corn, soybean and wheat exports in 2013-14 at 3,695 million bus, up 21% from 2012-13 but down 7% from 2011-12, with most of the increase expected in corn, up 67% from last year at 1,225 million bus, with wheat seen up 9% at 1,100 million bus and soybeans up 4% at 1,370 million bus. The marketing years for corn and soybeans began Sept. 1, so there has been little 2013-14 export data available due to the government shutdown. The spring wheat harvest wrapped up in September and strong wheat exports have added to rail, barge and ocean freight demand. For wheat the marketing year began June 1 and U.S.D.A. weekly export inspection data through Sept. 26 (the latest available) showed wheat shipments for the marketing year to date at 496,505,000 bus, up 40% from the same period in 2012-13.
But the primary factor in greater export demand is expected to be the record large 2013 corn crop and corresponding lower prices. Nearby December corn futures were trading around $4.40 a bu last week, down more than $1 from June highs and down more than $3, or 40%, from a year earlier.
“Corn below $4.50 offers value to many classes of end-users,” LSN news said in its corn market commentary last week.
Ocean freight, which has battled overcapacity for some time, is expected to benefit from increased grain export volume as grain prices fall as the result of this year’s larger crops.
Current ocean freight rates are the highest since December 2011, Mr. O'Neil said, although he expected some weakness in rates before the end of the year that would carry into 2014. Ocean freight rates have risen due to a combination of factors, including increased exports of grain and coal from the United States, he said. Vessel line-ups at U.S. ports are increasing, he said, which is typical for the first quarter of a new crop marketing year (for corn and soybeans) as increased supplies usually mean lower prices and a bump in export demand.
Containers (versus bulk freight) are not as oversupplied as earlier or as expected, Mr. O'Neil said, although a surplus continues to pressure shipping prices. The container market is keyed to imports from Asia (especially China), with Christmas season goods coming over mostly in July and August, he said. But the shipping season has stretched from June to September, and orders were not as large due to the still recovering U.S. economy.
“Can a seller find containers: yes,” Mr. O'Neil said. He noted that shipping companies have continued to attempt to raise rates on containers but have been forced to pull back increased rates due to reduced demand whenever prices go up.
Although the 2014 harvest is 11 months or so away, Mr. O'Neil said he is more concerned about transportation issues next year, if weather cooperates and the United States and the rest of the world have large crops. This year was in part a “restocking” year, which somewhat reduced shipping demand. But a second year of large crops, and potentially lower grain prices, may prove to be “quite a bit more dramatic story,” he said. “Time will tell.”