Costs to ship grain by rail volatile; ocean freight rates below average

by Ron Sterk
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Costs to ship grain by rail volatile
Rail freight rates for November and especially December have dropped off considerably.

KANSAS CITY — Costs to ship grain by rail jumped in October as the progressing harvest of forecast record large corn and soybean crops boosted demand for rail freight, but dropped off for November and December. Ocean freight rates, meanwhile, remained below recent average rates.

In late September a grain merchandiser in Kansas City said rail car costs in the secondary market jumped from about $400 under tariff to as much as $1,400 over tariff for October, adding about 50c per bu to the cost of buying wheat in the Southwest during the peak of the fall row crop harvest. At the same time, rail freight rates for November and especially December had dropped off considerably, he said.

Trade sources also reported only minor delays in delivery of empty rail cars and in shipments of grain by rail so far this season, although the corn and soybean harvests still had a few weeks to go. Corn was 24% harvested in the 18 major states as of Oct. 2, while soybean harvest was 26% completed, both slightly behind the five-year average, the U.S. Department of Agriculture said in its weekly Crop Progress report. A slower harvest pace helps to spread out demand for grain transportation.

In its Sept. 29 Grain Transportation Report, the U.S.D.A. indicated average shuttle secondary rail car bids and offers for rail cars to be delivered in October were $1,050 above tariff for the week ended Sept. 22, down $238 from a week earlier and down $750 from the peak in August but up $400 from a year ago. Average non-shuttle secondary bids and offers were $225 above tariff, down $50 for the week and down $175 from the peak but up $154 for the year. For November, average shuttle bids and offers were up $25 from a week earlier but down $500 from the peak in mid-August.

As of Sept. 1 the total cost of shipping wheat by unit train across major corridors ranged from 98c to $1.87 a bu, down 1% to 2% from a year earlier with the exception of a 15% jump in the route from Grand Forks, N.D., to the Duluth-Superior, Minn., export terminal. Shuttle train rates for wheat were $1.04 to $1.59 a bu, down 2% to 11% with a single exception of a 16% increase from Chicago to Albany, N.Y. The higher rail freight rates for October will boost grain shipping costs in most cases.

“I remind and encourage freight buyers in the non-shuttle market to book their freight needs now for the rest of the year and even into early 2017,” John Miller, BNSF Railway group vice-president for agricultural 
products, said at the end of September. He also noted that soybean trains were being loaded and were increasing volume to “meet the robust export program in the Pacific Northwest.”

Since the weather and demand debacle of the winter of 2013-14, railroads generally have enjoyed favorable winter shipping periods that have allowed timely delivery of grain by rail with only a few regional issues. Even recent heavy rains and flooding in Louisiana and the Upper Midwest resulted in only brief delays to rail grain shipments. But this fall will be the largest test of the rail system to date with record large total grain and oilseed production and increased export sales and shipments.

Despite the forecast record 2016 corn and soybean crops, the largest wheat crop since 2008, and a 10% jump from 2015-16 in combined exports of the three crops in 2016-17, U.S. railroads indicated at the annual National Grain Car Council meeting of the U.S. Surface Transportation Board (S.T.B.) in September that they were well prepared.

“Railroads highlighted improved train velocities and indicated that they are prepared to move the upcoming harvest,” the U.S.D.A. said, based on comments from the S.T.B. meeting, noting improved rail service metrics for shipping grain during the six-week period ended Sept. 14. Although the U.S.D.A. noted mixed signals, with negative signs including a 13% increase in origin dwell times and a slight spike in backlogged orders and positive signs of a 14% drop in outstanding rail car orders and a 7% increase in average grain unit train speeds.

“Because grain car loadings have been particularly high this year, the data does not suggest any major concerns in rail service as harvest continues,” the U.S.D.A. said.

The American Association of Railroads (A.A.R.) reported year-to-date (Jan. 1 to Sept. 24) loadings of grain totaled 829,587 cars, up 5.5% from the same period last year, compared with overall loadings of 9,460,059 cars, down 11%. Loadings of farm products and food, which include milled grain products but exclude grain, totaled 611,022 cars, down 3%.

Overall rail shipments have taken a hit this year from a 26% plunge in loadings of coal at 2,861,597 cars (still by far the largest category), and a 22% drop in petroleum and petroleum products, to 422,281 cars. Year-to-date increases were recorded in chemicals, grain, motor vehicles and parts and “other,” with declines in coal, farm products and food, forest products, metals and ores, nonmetallic minerals, and petroleum. After years of 
growth, even intermodal traffic was down 3% for the year at 9,811,598 cars.

Barge tonnage remains strong

Higher export shipments have been reflected in increased barge grain movement for several weeks. Total year-to-date export inspections of 10 major grains based on each respective marketing year were up 32% through Sept. 29, the U.S.D.A. said, including corn, up 44%, soybeans, up 36%, and wheat, up 26%.

Grain tonnage shipped by barge through the locks portion of the Mississippi river system totaled 28.6 million tons for the year through Sept. 10, up 23% from the same period a year earlier and up 43% from the five-year average, the U.S.D.A. said. Barge tonnage was expected to remain above average for the remainder of the year based on U.S.D.A. projected record soybean exports at 1,985 million bus, up 2% from 2015-16, and higher corn exports at 2,175 million bus, up 14%, and wheat exports at 950 million 
bus, up 23%.

“For most of 2016, the barge supply has been adequate despite the increased demand while barge freight rates have generally been below average,” the U.S.D.A. said in mid-September. Spot barge freight rates from Minneapolis-St. Paul for export grain on the Mississippi river system were $29.28 per ton on Sept. 13, down 10% from the five-year average; on the Illinois river were $20.09 per ton, 20% below the average, and at St. Louis were $13.29 per ton, 37% below the average; although all had increased from a week earlier. Barge demand and rates typically increase during fall corn and soybean harvest from early September to late November.

Ocean freight rates below average

Years of overcapacity were catching up with the ocean freight industry.

“So far the 2016 containerized grain market has been characterized by slow demand, overcapacity, historically low ocean freight rates and competition from record low bulk ocean freight rates,” the U.S.D.A. said.

Ocean freight rates for grain going to Japan during August were $28.81 a tonne from the Gulf, 34% below the four-year average, and $16.25 a tonne from the Pacific Northwest, down about 14%, according to O’Neil Commodity Consulting data.

January-July shipments of containerized grain and grain products were down 17% from the same period in 2015 and down 16% from 2014, the U.S.D.A. said. The top containerized grain shipments were distillers’ dried grains (although that may change as China placed import duties on U.S. D.D.G.s in September) and soybeans. About 95% of U.S. waterborne containerized grain shipments go to Asia.

The Wall Street Journal reported that overall global container volume in 2016 may be flat with 2015 and the lowest since 2009, when the global economic crises slowed trade. Freight rates for containers were about 30% below sustainable levels, and the 20 largest container lines were expected to see losses of $8 billion to $10 billion in 2016. The current situation has been exacerbated by slow economic growth in Europe and the United States and slower-than-expected growth in China, the report said.

“Shipping analysts say any operator with less than 5% global share of the container shipping market may be taken over by bigger players or be confined to regional trades,” The Wall Street Journal said. There are only four shipping companies with more than 5% of the global market.

Hanjin Shipping Co., South Korea’s largest operator and the seventh largest globally based on volume, filed for bankruptcy Aug. 1. Some indicated the exit of Hanjin may tighten the ocean freight market somewhat.

Truck tonnage remains soft

Trucks typically move grain shorter distances than rail, such as in the case of an ethanol plant drawing in local corn or from on-farm storage to country or terminal elevators. Long-haul trucks typically haul other types of freight, including food, but not as much grain.

The American Trucking Associations (A.T.A.) monthly for-hire truck tonnage index has shown considerable volatility this year, jumping 5.7% in August after declining 2.1% in July.

“Volatility continues to reign in 2016,” said Bob Costello, chief economist for the A.T.A. “This month’s (August) tonnage reading highlights this fact and underscores the difficulty in determining any real or clear trend in truck tonnage. Normal seasonal patterns are not holding in 2016.”

Speaking at the A.T.A.’s Management Conference and Exhibition in Las Vegas Oct. 1-4, Mr. Costello said, “The current cycle of larger-than-normal (manufacturer) inventories has taken longer than usual to resolve itself. Coupled with weakness in the manufacturing sector, we’ve seen softer-than-typical volumes in both the truckload and less-than-truckload sectors. Also, truckload carriers have added trailer capacity of late, likely in advance of the approaching electronic logging device (E.L.D.) compliance deadline. More small and medium fleets will, I believe, try to compensate for the impact of E.L.D.s by doing more drop and hook to reduce wait times.”

The D.O.E.’s Federal Motor Carrier Safety Administration will require E.L.D.s (versus traditional paper “log books”) as of Dec. 16, 2017, in an attempt to strengthen bus and truck drivers’ compliance with hours-of-service regulations and improve safety through reduced fatigue.

The truck driver turnover rate, the per cent of drivers who change jobs within a year, at large truckload fleets fell to 83% in the second quarter of 2016, the lowest since the same period in 2011, the A.T.A. said. Turnover at smaller fleets was at 79%, the lowest since the third quarter of 2015, and at less-than-truckload carriers was at 12%.

“The continued decline in the turnover rate reflects the continued choppiness in the freight economy,” Mr. Costello said. A higher turnover rate suggests increased demand for drivers, which typically is the result of greater freight movement.

Concerns about a looming truck driver shortage continue, with some estimating the U.S. industry will need as many as 400,000 drivers in the next five years. One unique long-term solution may be “driverless” trucks that are being tested, but which experts say may be 20 years away.

Also, Uber Technologies Inc., the company that revolutionized the global taxi business, has indicated its intention to enter the long-haul trucking market, according to a recent Reuters’ report. Uber also recently bought Otto, a self-driving truck start-up. Separately, self-driving buses are being tested in Helsinki, Finland.

Lower fuel costs have limited truck and rail fuel surcharges to the benefit of grain shippers in the past year, but may be moving higher should crude oil prices advance if the Organization of the Petroleum Producing Exporting Countries agrees to a limit on crude oil production. Monthly average on-highway diesel fuel prices, used by truckers and railroads to calculate fuel surcharges, reported by the Energy Information Administration of the U.S. Department of Energy have held between about $2 and $2.50 a gallon since September 2015, hitting a low of $1.98 a gallon in February 2016 and ending last week at $2.39 a gallon. Average monthly diesel prices had topped $4 a gallon at least briefly each year from 2011 to 2014.

A final factor affecting demand for grain shipping resources this year is low prices, the lowest in a decade or more in some cases. Farmers are expected to hold more of their grain for marketing when (if) prices improve in coming weeks and months. As with a slower paced harvest, the drawn out marketing of grain also means less strain on shipping resources, especially rail, during the concentrated fall harvest period.

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