U.S.D.A. transportation study focuses on rail industry changes impact on agriculture

BakingBusiness.com, June 15, 2010
by Ron Sterk

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A comprehensive report on U.S. agricultural transportation by the U.S. Department of Agriculture confirmed what most already knew — that agriculture is the largest user of U.S. freight transportation and that both the railroad and trucking industries are vital to U.S. agriculture. But the 600-plus page report also provided policy makers with information to make strategic decisions concerning agricultural shipping needs, and especially homed in on the impact on agriculture from changes in the rail industry in the past 30 years.

The massive U.S.D.A. study, mandated by the 2008 farm bill, covers truck, rail, barge and ocean freight as it relates to agriculture. It addresses the impact of U.S. rail deregulation, which began in 1980, along with concerns about funding inland waterway and highway systems, ocean container issues and biofuels transportation.

“Agriculture is the largest user of freight transportation in the United States, with 31% of all ton-miles recorded in 2007 being used in the movement of agricultural products,” U.S. Secretary of Agriculture Tom Vilsack said when the study was released.

Both the trucking and rail industries responded to what they saw as the study’s confirmation of their respective industry’s superiority in freight movement.

“The U.S.D.A. study provides the first holistic examination of agricultural transportation and highlights the essentiality of trucking to our modern agricultural production system,” said Russell Laird, executive director of the American Trucking Association’s (A.T.A.) Agricultural Transporters Conference. The A.T.A. cited the study’s finding that trucks “are the most effective method of moving goods short distances and for assembling quantities of products at elevators and warehouses for transloading to other modes of transportation.”

From the rail industry’s perspective, the Association of American Railroads (A.A.R.) noted the study “shows how the vital link between railroads and agribusiness supports the U.S. economy and economic recovery.”

“As U.S.D.A. said, rail is the most cost-effective mode of transportation available to many agricultural producers,” said Edward R. Hamberger, president and chief executive officer of the A.A.R. “Without railroads bringing America’s high-quality, low-priced grain to the global market, we’ll never achieve the president’s goal (of doubling U.S. exports in five years) and continue on our road to economic recovery.”

The study highlighted several policy issues the authors said should be examined. Those included viewing transportation governance as a system rather than the current disparate method over separate modes; consideration of the potential decrease in competition, reduced service and higher rates due to exemptions from many antitrust rules for railroads and ocean shipping; concern about the decrease in routing choices and competition due to rapid consolidation of the rail industry through mergers after deregulation; review of the 100-mile radius agricultural exemption for hours of service due to safety concerns; and funding of new waterway projects and ongoing maintenance.

Study finds less rail competition

Although the study reviewed all four major modes of transportation — trucks, rail, barge and ocean vessel — railroads received by far the most attention and volume in the report with sections on competition, rates, rate relief, service, capacity and investment. A fundamental conclusion was that “rail is the only cost-effective mode of transportation available to many agricultural producers.”

“The loss of rail-to-rail competition due to railroad mergers and the associated increase in market power was not foreseen by many when the Staggers Act was passed,” the study said. The Staggers Rail Act of 1980 basically deregulated railroads and promoted reliance on free markets for railroad profitability and on competition to protect shippers. After the act was passed, railroads reduced costs by eliminating excess capacity, abandoned many routes and branch lines, and merged to eliminate duplication, resulting in lower costs and higher productivity.

“The mergers increased railroad market power and profitability,” the study said. “Rates for many shippers fell from 1981 through the end of the 20th century. Since 2004, however, rates have begun to rapidly increase as railroads reach the limits of their capacity.

“The level of rail-to-rail competition for grains and oilseeds decreased significantly between 1992 and 2007. Almost 75% of agricultural areas lost rail competition (during the period).”

The Staggers Act also allowed railroads to charge different rates to different shippers.

“Nationally, not only are rail rates for grain and oilseeds higher than those of other commodities, but the rates have increased more rapidly during the four years since 2003,” the study said. “Rail rates for grain and oilseeds rose 46% from 2003 to 2007; rates for all other commodities increased 32% in the same period.”

Further, the study indicated “considerable” evidence railroads boosted profits as fuel surcharges recovered more than the additional cost of fuel.

The study noted railroads’ share of grain transportation has decreased in recent years due to the way grain is marketed, higher rail rates and the closure of branch lines. The shift to shuttle trains and higher capacity cars limited areas served by rail, resulting in additional truck movement of grain to terminal elevators, and in some cases, lower prices for grain in the country.

Water shipping seen competitive

The study noted that although only five companies accounted for 75% of the covered barge traffic on the Mississippi river system, and only two companies provided 80% of traffic on the Columbia-Snake river system, the industry’s rate structure was considered highly competitive.

The U.S.D.A. said the U.S. barge fleet is aging and that the number of barges on the Mississippi river system declined about 18% since 1998.

A report from Informa Economics, a private analytical company in Memphis, Tenn., noted the number of inland U.S. barges in use last year fell to the lowest number in 21 years. The number of covered barges dropped for the 11th consecutive year in 2009 and open barges fell for the first time since 2004, but tank barges increased for the third consecutive year, Informa said, with an aggregate of 628 new barges put into use last year while 1,126 were retired.

Although market share of barges has been declining for several years, the U.S.D.A. study said barges continue to offer a low-cost alternative for shippers near inland waterways, accounting for movement of 30% of wheat, 52% of soybeans and 59% of corn to ports for export over the five-year period studied.

But the study noted low-cost barge shipping was achieved in part because the U.S. Army Corps of Engineers pays all operational and maintenance costs and much of the capital costs for inland waterways. A key issue facing the barge industry was financing the upkeep and improvement of the waterway system.

“The balance of the Inland Waterways Trust Fund, which finances 50% of most of the capital costs of the inland waterways, has been declining since 2002 because expenditures have increased and revenues have declined,” the study said. “It is unclear how the funding will be provided.”

The study also noted the bulk ocean vessel market was “highly competitive,” but the container market, by which 50% of agricultural products by value and 20% by volume are shipped, faced challenges of availability.

Ocean transportation was critical to agriculture since the United States traditionally has exported 25% of its total grain production, including about 50% of its wheat, 37% of soybeans and 18% of corn, the study said. About 62% of U.S. grain exports moved out of the Gulf in 2009 and 25.5% from the Pacific Northwest.

Trucking is critical and competitive

“Trucking is critical for American Agriculture,” the study said. “The industry carries 70% of the tonnage of agricultural, food, forest products, alcohols and fertilizers. More than 80% of cities and communities are served exclusively by trucks. The first and last movements in the supply chain from farm to grocery store are by truck.”

Further, the study noted the trucking industry was highly competitive.

“Half of all trucking companies own one truck, driven by the owner,” the study said. “This keeps rates low; the average operating costs are 95% of operating revenue.”

The U.S.D.A. said that as trucking demand dropped in 2008 due to the recession, 3,065 trucking companies with five or more trucks, and probably many more with fewer than five trucks, went out of business. At the time of the study there were 691,000 trucking businesses.

A major issue facing the trucking industry that was only lightly mentioned in the U.S.D.A. study was the shrinking pool of truck drivers.

A recent report from the Council of Supply Chain Management Professionals, sponsored by Penske Logistics, concluded the U.S. trucking industry will lose 200,000 drivers this year, another 200,000 next year and about 1 million over the next 15 years. Reasons cited were replacement of laid-off drivers during the recession as the economy recovers, stricter safety regulations and retirements. About one in six current drivers was 55 years old or older, the study noted.

As with inland waterways, the U.S.D.A. cited concerns about funding shortages for new projects and maintenance of the highway system, as well as of ports for ocean vessels.

“To keep America’s agriculture strong and competitive in the global market, this network must be maintained and strengthened,” the U.S.D.A. said.

Truck, rail tonnage shows recovery

Bulk and containerized freight shipments via truck and rail have been rising steadily for several weeks, if not months, along with the cost of shipping on both land and water, indicating the improving health of the nation’s economy.

The American Trucking Association’s For-Hire Truck Tonnage Index increased for the sixth time in seven months in April, the most recent reporting period. The seasonally

adjusted index was 110.2% of the year 2000 base of 100, up 0.4% from March and the highest since September 2008, the A.T.A. said. April tonnage was up 9.4% from a year earlier, the largest gain since January 2005. Year-to-date tonnage rose 6% from the same period in 2009, the A.T.A. said.

“Truck tonnage volumes continue to improve at a solid, yet sustainable, rate,” said Bob Costello, chief economist for the A.T.A. “Tonnage is being boosted by robust manufacturing output and stronger retail sales. For most fleets, freight volumes felt better than reported tonnage because the supply situation, particularly in the truckload sector, is turning quickly.”

The rail industry is seeing a similar rebound. In its latest monthly report, the A.A.R. said intermodal volume on U.S. freight railroads for the week ended May 29 was the highest since November 2008. Container volume was up 39.5% and trailer volume was up 25.2% from the same week in 2009, with containers up 19.4% but trailers down 23.3% from 2008, the A.A.R. said. The largest increase was for farm products, excluding grain, up 41% from 2008.

“For the first 21 weeks of 2010, U.S. railroads reported cumulative volume of 5,923,333 carloads, up 7.2% from 2009, but down 13.5% from 2008,” the A.A.R. said. Rail traffic had increased 12 consecutive weeks before falling slightly the week ended May 22, although numbers remained well above 2009 levels.

Resolution of U.S.-Mexico truck dispute still awaited

WASHINGTON — Despite the Obama administration’s stated desire in August 2009 for a quick resolution to a cross-border trucking dispute with Mexico, both countries remain at odds as the issue has drug on for nearby 15 months.

The issue involves Mexican tariffs on $2.4 billion worth of U.S. produced items, including many agricultural products, imposed after the Obama administration ended a pilot cross-border trucking program in March 2009. The reason given for the decision was safety concerns of long-haul trucks from Mexico, but proponents of the program blamed the administration for cowering to pressure from the Teamsters Union. Proponents also noted the United States was obligated to the program under the North American Free Trade Agreement.

U.S. transportation secretary Ray LaHood told the Senate Transportation, Housing and Urban Development Appropriations subcommittee in March a plan was being finalized, and attributed the delay to getting sign-offs from the five different cabinet members involved “every time we made a change.”

Subcommittee chairwoman Senator Patty Murray attributed the closure of an Idaho potato processing facility earlier this year to the prolonged dispute.

Hopes for a resolution were heightened when Mexico’s President Felipe Calderon visited U.S. President Barack Obama in Washington on May 19. Mr. LaHood indicated at a May 6 subcommittee hearing the topic would be discussed by the presidents with an announcement expected “very soon.”

Despite the ban, the U.S. Bureau of Transportation Statistics of the U.S. Department of Transportation in its monthly TransBorder Freight Data report said merchandise trade by truck between the United States and Mexico totaled $22.5 billion in March, up 36% from March 2009. U.S. imports from Mexico by truck were up 39% while exports to Mexico were up about 32% from a year ago.

Rail cars ample for winter wheat

Grain rail carloads originated on five major U.S. railroads year-to-date through May 22 were up 16% from a year ago, according to data from the U.S. Department of Agriculture. Rail delivery of all grain and oilseeds to ports was up 12% through May 26, the U.S.D.A. said. But wheat was not part of the gain.

Lagging export demand for U.S. wheat has been an industry malady all year due to ample global supplies and lower prices from many (most) foreign supplies. Marketing-year-to-date export wheat shipments as of May 20 were 17% behind the same period last year, compared to 9% ahead for corn and 25% more for soybeans, with the combined total up 7%, according to U.S.D.A. data. On a per-class basis, exports of soft red winter wheat were down 47% from a year earlier, hard red winter down 26%, hard red spring down 1%, soft white winter up 16% and durum up 111%.

The lack of export demand has become especially acute during the current hard red winter wheat harvest, resulting in ample rail cars available to move new crop supply.

“There are plenty of cars because there is close to zero demand and the protein is very low,” Kevin Kaufman, group vice-president, agricultural products at Burlington Northern Santa Fe Railroad, said concerning this year’s hard red winter wheat crop. “Wheat cash basis levels are at record low numbers because there is no bid from the Texas Gulf for export wheat. Elevators are canceling car orders.

“The big story is the large crop, poor protein and no export demand. I have never seen it in my career. The cash basis in some areas is as low as -$2 per bu (below the Kansas City July wheat futures contract). Carrying charges are huge and wheat is being stored everywhere, including the ground. Farmers obviously prefer not to sell.”

Mr. Kaufman said rates for rail cars in the hard red winter wheat area were up $80 a car from a year ago.

The cost of shipping by unit and shuttle trains compared with a year ago was up 9% to 18% for wheat, up 5% to 16% for soybeans and down 2% to up 14% for corn as of May 1, the U.S.D.A. said based on data from four major railroads, including both tariff and fuel surcharges.

Fuel surcharges, based on the Energy Information Administration’s U.S. average highway diesel fuel price, with a two-month lag, were well above year-ago levels.

The BNSF surcharge for grain and feed products was 46c per car per mile for June and July, up from 25c in June and July 2009, as posted on the company’s web site. The surcharge added by the Union Pacific Railroad was 20c per mile for the two-month period, compared with zero a year ago. And the posted surcharge for Kansas City Southern Railroad will be 24c in July and is 23c in June, also compared with zero a year earlier. The charges were based on average highway diesel prices of $3.069 a gallon in May 2010, $3.059 in April 2010, $2.092 in May 2009 (a multi-year low) and $2.22 in April 2009.

Since retreating to a four-year low around $2.02 in March of 2009, average highway diesel prices steadily have climbed, topping near $3.13 a gallon in mid-May 2010. Diesel prices eased modestly the past few weeks, but still were up about 30% from a year ago.

Costs for shipping grain by water also have increased. Southbound barge freight rates to the Gulf as of June 1 were up from 4% to 43% from a year ago, with the largest increases from Cincinnati and lower Ohio (both up 43%), the U.S.D.A. said.

The cost of shipping bulk grain to overseas markets in the first quarter of 2010 was about unchanged from the fourth quarter of 2009, but was up from 48% to 111% from the first quarter of last year, according to O’Neil Commodity Consulting as reported by the U.S.D.A. The rate for shipping bulk grain from the Gulf to Japan was $67.29 a tonne in the first quarter, up 87% from the same period last year, to China was $65.54 a tonne, up 85%, to Rotterdam was $24.92 a tonne, up 48%, and from the Pacific Northwest to Japan was $39.67 a tonne, up 111%.

The U.S.D.A. said the world bulk vessel fleet was expected to increase more than 50% in 2010.

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