KANSAS CITY — Lower diesel fuel prices, moderate winter weather (except in the Northeast), reduced export shipments of U.S. grain, easing demand for rail resources to ship crude oil and significant investment by railroads have resulted in vastly improved grain logistics, including lower shipping costs and more timely deliveries, compared with last year. The improvement, most noticeable for rail shippers, came despite record large corn and soybean crops in 2014 and protracted labor issues at West coast ports settled only a few weeks ago.
“This is not a time when transportation issues are a real hot button,” said Randal Linville, chief executive officer, Agspring L.L.C., a Leawood, Kas., holding company focusing on grain handling, processing and logistics. He said the marketplace had adapted to $50-a-barrel crude oil and not $100 oil, which means demand for rail to move oil from the shale oil fields of the Bakken region of the Upper Midwest has peaked and there was “no worry about the lack of capacity.”
Rail shipments of petroleum and petroleum products were down 2% from a year ago in the week ended April 25 and were up only 0.2% for the calendar year to date, according to data from the American Association of Railroads (A.A.R.). Through Nov. 1, 2014, year-to-date shipments of petroleum and products were up more than 13% from the same period in 2013. Shipments peaked in the August-September period of 2014 and have declined monthly (through March) since December.
Recent multi-year low crude oil prices benefited other modes of transportation as well with sharply lower diesel fuel prices. The U.S. average on-highway weekly diesel fuel price hit a five-year low in mid-April of $2.75 a gallon, the U.S. Energy Information Administration said. Prices have edged up the past three weeks and crude oil topped $60 a barrel last week for the first time in 2015, but the average diesel fuel, at $2.85 a gallon last week, still was more than $1, or 28%, below year-ago prices.
The on-highway average diesel price is used to determine fuel surcharges added by railroads and trucking companies.
Don Wille, chief operating officer, Thresher Artisan Wheat, Blackfoot, Idaho, and other locations, suggested the worst of the rail performance problems resulted from a larger (2013) corn crop and more grain to move than expected following a drought year in 2012, expanded demand for railroad resources to move crude oil from the Bakken shale oil region, which was more profitable for railroads than grain, and complacency on the part of some grain companies and merchandisers to buy freight after several years of smaller crops, all of which was complicated by “pretty big” snowfalls at the most inopportune times in the winter of 2013-14.
Ahead of the 2014 harvest, merchandisers overestimated freight needs and bid freight costs to record highs in some cases, Mr. Wille said, expecting farmers would more readily sell their record large 2014 crops. They didn’t realize the impact of farmers having “lots of money” from high prices the prior couple of years and had little need to sell grain at lower prices. At the same time, last year’s generally lower quality crops, especially wheat from Idaho to Michigan, boosted freight demand as millers often “bought two bushels and hoped one would get shipped to them,” Mr. Wille said. As rail demand for oil slowed and there was a generally mild winter, “everything just rolled,” he said. “Grain shippers were being flooded with rail cars, and they didn’t have enough grain to put in them. They overreacted from one year to the next.”
That has been evident in dramatically lower rail freight costs. During the worst of conditions last year, and ahead of the fall harvest when some shippers sought to secure rail cars after the prior season’s shipping debacle, freight costs above $3,000 per car were common with rates as high as $6,000 per car reported. Not so this year.
“During the week ending April 23, average May shuttle secondary rail car bids/offers per car were $300 below tariff, the same as last week and $1,150 lower than last year,” said the U.S. Department of Agriculture in its April 30 weekly Grain Transportation Report. “Non-shuttle secondary rail car bids/offers were $138 below tariff, down $38 from last week and $1,013 lower than last year.” While actual freight rates charged by railroads have been increased in some cases, rail car prices on the secondary market have tumbled.
Impacting rail car availability and costs have been a combination of increased investment by railroads, indicated at $29 billion in 2015, with more focus on serving grain shippers.
U.S. railroads originated 18,166 carloads of grain in the week ended April 18, down 16% from a year ago and down 6% from the three-year average, the U.S.D.A. said, although year-to-date originations of 335,754 carloads were up 9%. Year-to-date shipments on the BNSF were up 24%, on the Union Pacific were down 6% and on Kansas City Southern were down 10%. But year-to-date rail deliveries of grain to U.S. ports through April 22 were down 7% from a year earlier at 141,057 carloads.
The U.S. Department of Agriculture in its April World Agricultural Supply and Demand Estimates forecast combined exports of wheat, corn and soybeans in 2014-15 at 4,470 million bus, down 7% from 2013-14, with decreases in corn and wheat more than offsetting an increase in soybeans. These numbers are subject to revision in the May 12 WASDE. Year-to-date export inspections through April 30 for wheat were down 27% (with only one month left in the marketing year) from the same period a year earlier, for corn were down 5% and for soybeans were up 11%.
Twelve-year highs in the value of the U.S. dollar earlier this year have been a key factor limiting export demand for many U.S. grains as a strong dollar makes U.S. products more expensive for foreign buyers. The rise in the dollar has slowed recently, and may have peaked, but isn’t expected to decline sharply any time soon, which will continue to limit demand for U.S. commodities. Soybeans have been the exception because of seemingly insatiable demand from China.
Reduced exports have come despite sharply lower grain prices. July wheat futures prices as of May 1 were down from 30% to 40% from a year earlier, and set fresh contract lows again last week, corn prices were down about 30% and soybean and soybean meal prices were down 35%.
Lower grain prices, in addition to discouraging farmer selling, have encouraged more grain and oilseeds to be “marketed” via meat, milk and eggs, Mr. Linville said, which limits the need to transport as much grain. The U.S.D.A. in April forecast use of corn for feed in 2014-15 at 5,250 million bus, up 4% from 2013-14, and domestic soybean meal use at 30.5 million tons, up 3%.
While some issues remain, including truck driver shortages, concern about rail performance reporting and others, there is ample evidence that movement of agricultural products is the best it has been for months. Focus currently is on preparation for the winter wheat harvest.
“We expect a larger Texas and Oklahoma wheat crop and are ready for the movement,” said John Miller, group vice-president, agricultural products, BNSF Railway, in his April 29 podcast. “We are already in the process of positioning approximately 1,000 cars to be ready for this southern wheat harvest.”
Based on significantly improved crop condition ratings from a year ago in Texas and Oklahoma and equal planted area (100,000 more acres in Oklahoma and 100,000 fewer in Texas), the hard red winter wheat crop in those states certainly looks to be larger this year, although there is more uncertainty about the Kansas crop where 200,000 fewer acres were planted and ratings, though better than last year, lag the improvement seen in the other two states. And there likely will be no rush to sell new crop wheat with prices near five-year lows, storage space available and export demand mediocre at best.
The U.S.D.A.’s first survey-based 2015 winter wheat production estimate is May 12.
Mr. Miller said BNSF, the nation’s largest mover of grain and agricultural products, was performing well during the final push to deliver fertilizer to the northern tier ahead of spring planting, and he was “confident we will meet the demand forecast for these products.”
“The condition of the network remains quite fluid again this week,” Mr. Miller said in his April 29 update. “We have seen no significant service interruptions affecting overall system velocity. Agricultural velocity for April continues to match the 198-miles-per-day trend we obtained last month. Shuttles released to depart in April have improved a full hour from last month, trending at 6.7 hours per train.”
BNSF’s cars past due and average days late exemplify the vast improvement in rail performance from a year ago in the railroad’s agricultural segment. Mr. Miller said as of April 29 BNSF had 281 cars past due overall, including 161 cars in North Dakota and 67 cars in Montana. The cars averaged seven days late overall, with North Dakota and Montana both at 7.4 days. As of May 1, 2014, BNSF had 14,451 rail cars past due, with about half of those in North Dakota. Total average days late were at 26.4, ranging from 19.8 days in Minnesota to 32.5 days in Montana.
Mr. Wille said he considered rail performance “back to normal.” While some shippers still noted delays, they agreed rail service was vastly improved from a year earlier.
Barge and ocean freight markets also have seen relative calm, largely the result of more than adequate supply for lower exports. Year-to-date barge grain movement totaled 9,403,000 tons as of April 25, down 6% from the same period last year, the U.S.D.A. said. Ocean freight, especially bulk, has been in oversupply for some time. Rates to ship grain to Japan from the U.S. Gulf and from the Pacific Northwest were about 39% below year-ago levels and below the four-year average, according to O’Neil Commodity Consulting.
Trucking issues remain little changed from a year ago with driver shortages still the overhanging concern. That mainly affects long-haul carriers and less so short-haul, which constitutes most of the grain moved by trucks, although there has been a marked increase in demand for short-haul grain movement in recent years to supply corn to ethanol plants, which draw most supply locally. The U.S.D.A. forecasts 5,200 million bus, or 37% of the 2014 corn crop, will be used to produce ethanol in 2014-15. There also are some seasonal shortages of grain haulers typically during fall harvest.
The American Trucking Associations for-hire Truck Tonnage Index in March was 133.5% of the 2000 base, up 1.1% from February and up 5% from March 2014. The February index was down 2.8% from a record high 135.8 in January and was the only month in the past six to show a decline.
“While tonnage did not fully recoup the loss from February, it increased nicely in March,” said A.T.A. chief economist Bob Costello. “I’d say that tonnage was one of the better indicators for the month, which is a positive sign for the broader economy. The next couple of months will be telling for truck freight volumes as we enter the spring freight season.”
While relative calm currently is the rule for grain shippers, with most modes of transportation actually being underutilized, there is a myriad of regulatory issues swirling around for railroads (see related story on Page 27) and the trucking industry, and funding issues to maintain highways, inland waterways and ports.
Mr. Wille said he was “mildly optimistic” about grain transportation in coming months, with the only scenario that could change that outlook being development of “a big export program,” which he sees as unlikely as strength in the dollar continues. Expected smaller wheat and corn crops in 2015 also should contribute to reduced shipping needs.
