Fuel costs push freight costs higher
May 15, 2012
by Ron Sterk
Fuel prices again are a major factor keeping transportation costs high even with crude oil futures prices dipping to their lowest level of 2012 last week. Diesel fuel prices have eased 2% since mid-April and were down 1% from a year-ago but still were contributing to multi-year high rail and truck fuel surcharges gradually reflecting the peaking energy prices.
Meanwhile, overall rail and truck tonnage volumes have continued to climb — which economists say suggests improving economic conditions — although grain tonnage is down from a year ago and truck freight tonnage is growing at a slower pace than in 2011. Rail grain shippers, though, are coming off one of their best performance periods over the past winter due to lower volume and mild weather. Rail needs, though, are expected to rise in the 2012-13 marketing year with significant increases to 2012 U.S. wheat and corn production forecast.
The U.S. average on-highway diesel fuel price the week of May 7 was $4.057 a gallon, according to the Energy Information Administration (E.I.A.) of the U.S. Department of Energy. That value was down 9c a gallon, or 2%, from the 2012 high of $4.148 a gallon the week of April 9 and was down about 5c, or 1%, from $4.104 a gallon a year ago when diesel prices were coming off their weekly 2011 high of $4.124 a gallon the first week of May. The on-highway price recorded April 9, 2012, was the highest since $4.207 a gallon in mid-August 2008 but still was about 62c, or 13%, below the record high of $4.764 recorded in mid-July 2008.
In its April Short-Term Energy and Summer Fuels Outlook, the E.I.A. forecast diesel fuel prices to average $4.15 a gallon in 2012, up 31c, or 8%, from $3.84 a gallon in 2011. Third- and fourth-quarter 2012 prices were forecast to average above $4.20 a gallon compared with $3.87 in 2011. Last week in its revised May Short-Term Energy Outlook, the E.I.A. reduced its forecast 2012 average diesel price by 9c, to $4.06 a gallon, and dropped third- and fourth-quarter projections to $4.09 and $4.10 a gallon, respectively, reflecting “falling global crude oil prices over the past month.”
Diesel prices impact users of trucking and rail service specifically through surcharges, which may be significant. While fuel surcharges allow railroads, independent truckers and trucking companies to maintain profit margins and keep freight rates stable, the charges increase the cost of shipping paid by the buyer or the seller.
Anecdotal accounts indicate fuel surcharges in place for tractor-trailer rigs have surpassed 50c per mile in some cases during the past couple of months. Unlike railroads, there is no standardized formula for trucking fuel surcharges, in part due to the large number of independent owner-operators, so the charges can vary widely.
“In many cases, trucking companies and owner-operator independent drivers are not able to pass on the full increase in fuel costs to shippers due to existing contracts, competition and the need for backhaul cargo to cover at least some of the costs of operation,” the U.S. Department of Agriculture said in its most recent Agricultural Refrigerated Truck Quarterly covering the fourth quarter of 2011. Fuel surcharges for farmers or grain companies marketing their own grain with their own trucks also do not come into play.
The U.S.D.A. said the average truck rate for produce shipments in the fourth quarter of 2011 was $2.29 per mile, up 8% from the same period a year earlier, while diesel fuel prices in the quarter averaged $3.86 a gallon, up 22% year-over-year.
Fuel surcharges for railroads, which have been in place since at least 2007, are generally more structured than for trucks, but are equally high since most are mileage-based using the E.I.A. average on-highway diesel fuel price with a two-month lag. Some railroads have multiple fuel surcharge programs, including per cent of revenue and crude oil based formulas.
Based on information available from the web sites of two major U.S. rail shippers, Burlington Northern Santa Fe (BNSF Railway Co.) and Union Pacific Corp., the mileage-based fuel surcharge for shipping grain in May and in June will be 41c per car per mile for both companies. For U.P. that’s the highest rate since 45c a mile in October 2008, and just above last year’s high of 40c a mile in June 2011 for both companies.
Crude oil prices seen flat through 2013
Also in its April short-term energy outlook, the E.I.A. forecast West Texas intermediate crude oil to average about $106 a barrel in 2012, up $11, or 11%, from about $95 in 2011. Last year crude oil prices peaked in the second quarter, dropped sharply in the third quarter and rose in the fourth. The E.I.A. expects W.T.I. crude oil prices to hold about steady from the second quarter through the end of the year. In its May outlook, the E.I.A. lowered its 2012 average W.T.I. crude oil price forecast to about $104 a barrel, still up about $9 from 2011.
“E.I.A. expects that global oil markets will continue to remain tight in 2012, although markets have eased somewhat since mid-March,” the agency said. “E.I.A. expects crude oil prices to remain relatively flat in 2013.” The E.I.A. adjusts its projections monthly if necessary.
Nearby New York crude oil futures prices, meanwhile, tumbled about $11, or 10%, the past two weeks to about $95 a barrel by last Tuesday, the lowest level since December 2011, mainly on concerns about fuel demand because of recent political events in Europe.
How much of an impact the domestic and global economies put on petroleum prices remain to be seen, but the E.I.A. forecast U.S. 2012 summer gasoline demand (April through September) would decline 0.5% to the lowest level in 11 years, due in part to gasoline prices that are about 25c a gallon above year-ago levels, peaking at $4.01 a gallon in May. In its May outlook, though, the E.I.A. reduced its summer driving season gasoline price forecast by 16c a gallon from its April projection.
Tonnage gains in 2011, mixed in 2012
Tonnage moved by trucks, as tracked by the American Trucking Associations’ For-Hire Truck Tonnage Index, ended 2011 at a seasonally-adjusted record high of 124.4% of the year 2000 base of 100, up 5.8% from 2010, which grew at the same rate from 2009, the A.T.A. said.
But the truck tonnage index has wavered since the strong showing in 2011. The seasonally-adjusted index declined 4% in January, rose 0.5% in February and inched up 0.2% in March to 119.5, the A.T.A. said.
“March tonnage, and the first quarter overall, was reflective of an economy that is growing, but growing moderately,” said Bob Costello, A.T.A. chief economist. “The pace of freight definitely slowed from the torrid pace of 2011.” Mr. Costello said he expects truck tonnage to grow at a moderate 3% for the year, “which is more in line with normal growth.”
On the rail side, the Association of American Railroads also has documented mixed results so far this year. For the first 17 weeks of 2012, U.S. rail carloads of all products were a cumulative 4,792,195, down 3.2% from the same period in 2011, while trailers and containers totaled 3,875,396, up 2.8%, the A.A.R. said. Shipments of coal, by far the largest bulk commodity moved by rail, at 1,983,598 carloads for the year-to-date ended April 28, were down 11.3% from the same period last year. Grain originations in the first 17 weeks totaled 352,373 carloads, down 12.1% from a year earlier.
“There is no denying that coal is a crucial commodity for railroads, and there’s also no denying that recent declines in coal traffic are presenting significant challenges to railroads right now,” John T. Gray, A.A.R. senior vice-president, said in March, when coal carloads dropped nearly 16% from March 2011.
Rail carloads originated in April totaled 1,113,105, down 5.5% from April 2011, the A.A.R. said, while intermodal volume was 946,951 trailers and containers, up 3.6% from a year ago. Grain carloads tumbled 18% in April while coal carloads fell 16.2% from April 2011.
At the same time, freight rates for shipping grain by rail have been mixed but mostly higher. For the week ended April 26, the average non-shuttle secondary railcar bids/offers per car for May were $5 below tariff and $14 lower than a year ago, the U.S.D.A. said in its May 3 Grain Transportation report. But average shuttle bids/offers were $329 below tariff, up $133.50 from a year ago.
Unit train rates effective May 1 were mostly 4% above year-ago rates for wheat while shuttle train rates were up 3% to 5%, according to the May 3 U.S.D.A. Grain Transportation report. Rates for corn were up 5% to 19% for unit trains and 4% to 7% for shuttle trains. And rail rates for shipping soybeans were mostly up about 20% for unit trains and 5% to 6% for shuttle trains. Across all three grains and depending on route, rail tariff rates per car ranged from a low of $1,934 to a high of $5,854, and fuel surcharges ranged from a low of $87 per car to $779 as of May 1, the U.S.D.A. said.
Shipments to Mexico increase
One area that has shown an increase in traffic is surface trade (truck, rail and pipeline) between the United States, Canada and Mexico. In 2011, surface trade increased 14% from 2010, according to the Bureau of Transportation Statistics, with February 2012 trade up 17% from a year earlier.
U.S. 2011 agricultural exports to Mexico rose 25% in value from 2010, due to a combination of drought, a freeze and increased tourism in Mexico, according to the U.S.D.A.
“As the drought continues in 2012, Mexico is expected to become the second largest U.S. agricultural export destination due to an increase in U.S. shipments of corn, wheat, dairy and poultry,” the U.S.D.A. said. In 2011 Mexico ranked third behind China and Canada.
Shipments of U.S. railcars of grain to Mexico totaled 48,782 in 2011, up 14% from 2010, the U.S.D.A. said. Tariff rail rates to Mexico increased 11% to an average of $6,291 per car, with fuel surcharges up 3% at $646 per car. U.S. corn and soybeans are mostly shipped by rail to Mexico.
Ocean freight rates for bulk grain shipped to Mexico averaged $19.68 to $22.02 per tonne in 2011, down 7% and 5%, respectively, from 2010 depending on the size of vessel, the U.S.D.A. said. Wheat and sorghum is mostly shipped by water.
Agricultural container shipments to Mexico in 2011 increased 23% from 2010, the U.S.D.A. said, with shipments of dextrose and glucose the No. 1 containerized export, accounting for 20% of total shipments, according to the U.S.D.A.
Ocean freight rates decline
Total containerized grain exports were a record high 538,000 twenty-foot equivalent units in 2011, due to “sufficient container availability most of the year and relatively low ocean freight rates,” the U.S.D.A. said.
Exports of distillers grains made up 35% of containerized U.S. grain exports in 2011, followed by soybeans at 28%, corn at 14%, animal feed at 4%, soybean meal and flour at 4% and “other” at 8%, according to data provided to the U.S.D.A. from the Port Import Export Reporting Service.
“As we finish the first quarter of 2012, exporters face tight container supplies at inland locations and reductions in vessel service,” the U.S.D.A. said. “Weak import demand at this time of year causes carriers to take measures to tighten surplus vessel capacity in the market. During the first part of 2012, carriers have removed approximately 5% of the global vessel fleet.” The withdrawal programs may continue beyond May if demand does not improve, the U.S.D.A. said.
Additionally, indications were container leasing rates and purchase prices have risen about 40% and 130%, respectively, in the past two years, the U.S.D.A. said.
“Possible rate increases, limited vessel service and container availability challenges will leave agricultural
exporters facing higher transportation costs and logistical challenges in the face of increasing demand for their products overseas,” the U.S.D.A. said.
“Ocean freight rates for shipping bulk commodities declined during the first quarter of 2012 because of slow demand for bulk shipments, partially caused by bad weather in Australia and Brazil,” the U.S.D.A. said in the May 3 Grain Transportation report. “Ocean freight rates fell for both large and small bulk vessels.”
Freight rates for shipping grain from the U.S. Gulf to Japan averaged $50.18 per tonne in the first quarter of 2012, down 8% from a year earlier and 23% below the four-year average, the U.S.D.A. said. Shipments from the U.S. Gulf to Europe were $19.91 per tonnes, down 14% from 2011 and 41% under the average. And shipments from the Pacific Northwest to Japan were $28.28 a tonne, down 11% and 25%, respectively from the 2011 average.
“The outlook for freight rates remains mixed as vessel supply outpaces demand but global grain trade is projected to rise,” the U.S.D.A. said. The agency noted a 6% increase in 2011-12 global grain trade over last year forecast by the International Grains Council and increase bulk freight demand for iron ore exports and coal imports by India were factors that may boost ocean freight demand. But forecast lower wheat exports from the United States and Europe and reduced coal exports from Indonesia may cut freight demand.
“Overall, it appears the freight market likely will fluctuate but remain moderate for a long period of time while market dynamics work themselves out,” the U.S.D.A. said.
Tolls charged to pass through the Panama Canal were set to change July 1 with a new structure to “align toll charges with the value provided by the route,” according to the U.S.D.A. The proposal, which still is under review, will adjust tolls for smaller vessels and increase the number of vessel segments to 11 from 8.
U.S. 2011-12 exports down, 2012-13 up
Combined production of U.S. corn, soybeans and wheat in 2011 was 17,414 million bus, down 3% from 2010. Projected exports of the three major grains for 2011-12 totaled 4,040 million bus, down 13% from 2010-11, according to U.S.D.A. data.
First-quarter 2012 corn, soybeans and wheat inspected for export from all ports totaled 28.36 million tonnes, down 14% from 2011 and 8% below the five-year average, the U.S.D.A. said based on data from the Grain Inspection, Packers and Stockyards Administration.
Grain inspections at all U.S. Gulf ports were a record low 15.96 million tonnes in the first quarter, down 26% from the same period in 2011 and 18% below the five-year average, the U.S.D.A. said. A 73% decrease in rail deliveries of grain to Gulf ports more than offset a 20% increase in barge deliveries from a year earlier when flooding reduced river shipping.
First-quarter shipments from the Pacific Northwest totaled 8.28 million tonnes, up 8% from a year earlier and up 4% from the five-year average, the U.S.D.A. said, as freight rates favored grain shipments to that region over the Gulf.
By commodity, first-quarter 2012 soybean inspections were 12.21 million tonnes, down 7% from 2011 but up 5% from the five-year average and above corn inspections, the U.S.D.A. said. China accounted
for 66% of U.S. soybean exports.
Corn inspected for export in the first quarter totaled 9.87 million tonnes, also down 7% from 2011 but 20% below the five-year average. Corn inspections at the Gulf were down 17% and record low.
“Despite the drop in total corn inspections, shipments to China were up over 1,000% during the first quarter,” the U.S.D.A. said. “Also, (2011-12 marketing) year-to-date corn export sales to China were up over 1,200%.”
In its May 10 Crop Production report, the U.S.D.A. forecast U.S. 2012 winter wheat production at 1,694 million bus, up 13% from 2011. And in its World Agricultural Supply and Demand Estimates, the department forecast total U.S. 2012 production of wheat at 2,245 million bus, corn at a record 14,790 million bus and soybeans at 3,205 million bus. The three-crop total forecast production of 20,240 million bus is up 16% from 2011. Exports for 2012-13 were forecast at 1,150 million bus for wheat, 1,900 million bus for corn and 1,505 million bus for soybeans for a three crop total of 4,555 million bus, up 13% from an estimated 4,040 million bus in the 2011-12 marketing year.
A combination of less grain shipped, mild winter weather and the lack of spring floods has made for mostly trouble-free grain movement since last fall. But there will be changes in the months ahead. While weather remains an unknown, significantly larger forecast U.S. 2012 wheat and especially corn crops certainly will change the demand picture for grain transportation needs during the 2012-13 marketing year.