KANSAS CITY — Two winters removed from the rail nightmare of 2013-14 proved to be one that was mostly routine for grain shippers, aided in part by reduced needs due to sagging export sales of grain as well as reduced movement of shale oil. Ocean freight rates remained restrained by excess capacity, while the trucking industry also felt the impact of reduced volume. All modes of transportation welcomed the lowest fuel prices in years, although diesel prices have been rising since February.
Most everyone in the grain industry remembers the debacle of 2013-14 when high demand for rail services to move shale oil out of the Upper Midwest and inputs such as sand for fracking into that region coincided with large grain crops and severe winter weather that crippled rail transportation of grain and grain products as well as sugar and other agricultural items. But other than recent legal action between Archer Daniels Midland Co. and the Canadian Pacific Railway Co. (C.P.), that winter seems a distant memory after the past two winters.
“Rail service has been good,” said a transportation executive.
There were few anecdotal reports of grain rail shipment problems, either delays or getting rail cars, over the winter months. Users did complain about increases in demurrage charges to $200 per day per car by some railroads, however.
One factor contributing to reduced movement was lower grain and soybean prices relative to the past couple of years, which encouraged farmers to hold on to a larger share of their crops. Additions to on-farm storage capacity in recent years (especially when grain prices were high and farmers had money available), have allowed producers to store more grain and wait for higher prices to sell. The U.S. Department of Agriculture in its latest Grain Stocks report said March 1 stocks of wheat in all positions (on-farm and off-farm) were up 20% from a year earlier. Soybeans were up 15%, and corn was up 1%. Traders noted, of course, that at some point the grain will have to be moved.
The main disruptions to rail movement were across the South caused by flooding this spring, but that did not significantly affect grain movement overall.
In the legal action stemming from the winter of 2013-14, ADM filed a lawsuit March 18 in the U.S. District Court for the Central District of Illinois against the C.P. to recover damages “from C.P.’s failure to transport commodities to and from ADM North American facilities resulting from one of the worst and most persistent railroad service failures experienced by ADM in many years.” The lawsuit also alleges C.P.’s poor service in part was the result of cost-cutting and the pursuit of mergers and acquisitions by C.P.
C.P. said ADM’s claims were the result of a harsh winter and that it would “defend itself vigorously against ADM’s frivolous allegations.” Also on March 18, C.P. filed a claim in the U.S. District Court for the District of Minnesota seeking payment of overdue charges from ADM.
It likely will be some time before the court action is resolved. Meanwhile, on April 11 C.P. said it would no longer seek the unfriendly takeover of Norfolk Southern, ending months of contentious talk and antitrust concerns among regulators.
Fuel prices help keep costs down
While multi-year low crude oil prices in February had a broad impact on both agricultural and non-agricultural markets, the resulting low diesel fuel prices often resulted in savings for grain shippers, or at a minimum somewhat offset higher freight rates in the case of rail transportation. The average weekly retail (on-highway) diesel fuel price as of April 29 was $2.20 per gallon, up 10% from a multi-year low of $1.98 per gallon the week ended Feb. 19 but down 22% from a year earlier, according to data from the Department of Energy’s Energy Information Administration (E.I.A.). Although crude oil and diesel prices have risen from February lows, the E.I.A. expects only moderate increases over the next year, noting that prices can be volatile and highly unpredictable. The E.I.A. forecast diesel prices to average $2.11 a gallon the second and third quarters, down 23% from the same period last year. For all of 2016 the E.I.A. also expects diesel prices to average $2.11, down 22% from $2.71 a gallon last year and down 45% from $3.83 a gallon in 2014. The average for 2017 was forecast at $2.33 a gallon, up 10% from 2016.
Fuel surcharges for rail grain shipments were zero to minus $184 per car for unit trains and zero to minus $228 per car for shuttle trains as of April 1, the U.S.D.A. said. Rail fuel surcharges, which are based on the E.I.A.’s weekly average diesel price, were several hundred dollars per car in recent years. Fuel surcharges for trucks vary widely with no “standard” for the industry.
Grain, oilseed exports down 9%
Total export inspections for the respective marketing years to mid-April were down 9% for the three major commodities, according to data from the U.S.D.A. Leading the decline were corn and wheat shipments, both down 13%, followed by soybeans, down 7%.
In its April World Agricultural Supply and Demand Estimates, the U.S.D.A. forecast 2015-16 (ending May 31) wheat exports at 21.09 million tonnes (775 million bus), unchanged from its March forecast but down 9% from last year, down 34% from 2013-14 and the lowest since 1971-72. Wheat export shipments would have to average about 579,337 tonnes per week in the final six weeks of the marketing year to reach the U.S.D.A. forecast. Most analysts expect wheat exports will fall short of the U.S.D.A. forecast, having averaged only about 382,913 tonnes in the first 46 weeks, since little has changed to make U.S. wheat more attractive to foreign buyers. If anything, export prospects have worsened with expectations of a larger hard red winter wheat crop and prices firming from lows set a few weeks back.
Corn exports for 2015-16 (ending Aug. 31) were forecast at 41.91 million tonnes (1,650 million bus) in April, unchanged from the March forecast but down 11% from the prior year and down 14% from 2013-14. Corn shipments also were lagging the weekly pace needed to match the U.S.D.A. forecast.
Soybean exports for the year ending Aug. 31 were forecast at 46.4 million tonnes (1,705 million bus), up 1% from the March forecast, down 7% from a record high in 2014-15 and up 4% from 2013-14. Soybean shipments were running ahead of the weekly average needed to meet the U.S.D.A. forecast, “reflecting stronger global soybean imports led by China and several other countries including Iran, Bangladesh and Mexico,” the U.S.D.A. said in its April WASDE.
Rail tonnage down, rates up
Rail volume in the first 15 weeks of 2016 through mid-April totaled 3,613,417 carloads, down 14% from the same period in 2015, while intermodal volume totaled 3,848,344 units, up slightly, according to data from the American Association of Railroads. Three of the 10 carload groups were up for the period, with chemicals up 3%, motor vehicles and parts up 8% and “other” up 24%. But coal, by far the largest carload group comprising 29% of the total at 1,059,071 carloads, was down 34%, followed by petroleum and products down 22% at 171,381 carloads. Grain, at 323,197 carloads during the period, was down 4%, while other farm products and food were down 5% at 244,883 carloads.
In Canada, carloads totaled 1,055,553 for the 15-week period, down 10%, while intermodal was 871,163 units, down 1%. Canadian grain carloads of 117,348 were down 7%. Mexican rail traffic included 239,140 carloads, down slightly, and 157,115 intermodal units, down 1%. Grain carloads in Mexico were 17,940, up 12%.
Despite fewer carloads, indicating less demand, freight rates for shipping grain in the week ended April 21 were up from a year ago. Average May non-shuttle train secondary rail car bids and offers were $50 below tariff, up $50 from the prior week and up $88 from last year, the U.S.D.A. said in its Grain Transportation Report. May shuttle train secondary rail car bids and offers were $189 per car below tariff, up $6 from a week earlier and up $111 from a year ago.
The total cost for shipping grain was up for most unit train (at least 25 rail cars) routes and mixed for shuttle train (75 to 120 cars) routes, with wheat mostly higher but corn and soybeans mostly lower. Tariff rates plus (or minus) fuel surcharges for shipping wheat from Wichita, Kas., by unit train to New Orleans was $42.14 per tonne, or $1.15 per bu, up 2% from a year ago, and by shuttle train to Galveston-Houston, Texas, was $37.62 per tonne, or $1.02 per bu, up 7%, the U.S.D.A. said.
On the regulatory front, the rail industry won the implementation battle over positive train controls (P.T.C.), “a set of highly advanced technologies designed to make freight rail transportation … safer by automatically stopping a train before certain types of accidents occur,” the A.A.R. said. Congress passed the Rail Safety Improvement Act of 2008 mandating private railroads finance, develop, install and test P.T.C. technology on 60,000 miles of the nation’s rail network by Dec. 31, 2015.
Although supportive of P.T.C. overall, railroads called the deadline “arbitrary and unworkable,” and threatened to shut down late last year rather than face fines for missing the deadline. In December Congress passed H.R.38 19 — Surface Transportation Extension Act of 2015, which provided a three-year extension plus up to two additional years to finalize implementation and testing if railroads meet specific benchmarks. To date, railroads have spent more than $6 billion on P.T.C. development and deployment, the A.A.R. said.
Trucking profits sag on lower volume
The Wall Street Journal said April 21 that first-quarter profits for three of the largest U.S. trucking companies declined “as demand for freight-hauling services slumped.” First-quarter earnings compared with the same quarter a year earlier were down 13% at Werner Enterprises Inc., down 16% at Swift Transportation Co. and down 24% at Knight Transportation Inc.
Persistently high inventories at major retailers have reduced demand while too many trucks competing for reduced volume has driven down trucking rates, the W.S.J. said, as higher wages paid to drivers also were squeezing profits.
The report also noted that the weak freight market was forcing large trucking companies to find more spot business rather than sign long-term contracts.
The American Trucking Associations For-Hire Truck Tonnage Index was 137.6% of the 2000 base of 100 in March, up 2.2% from March 2015 but down 4.5% from February, when the index jumped 7.2% from January to a record high 144%. The March decline was the largest monthly contraction since September 2012, the A.T.A. said.
“The freight economy continues to be mixed with housing and consumer spending generally giving support to tonnage, while new fracking activity and factory output being drags,” said Bob Costello, chief economist at the A.T.A. “In addition, freight volumes are softer than the overall economy because of the current inventory overhang throughout the supply chain.
“Clearly, 2016 started soft for truck tonnage. There was a deceleration in freight volumes during the second half of 2015 which continued into the first month of 2016.”
He had warned that the February gain likely was not sustainable as long as inventories remained elevated.
On the policy front, the trucking industry got its first five-year federal highway bill in over a decade, with congress passing only two-year “patches” since 2005. President Barack Obama signed the Fixing America’s Surface Transportation Act, or FAST Act, into law in early December.
Bill Graves, president and c.e.o. of the A.T.A., said he was “very pleased” with passage of the new highway bill but added that “by most estimates, it still is inadequate.” The $305 billion bill includes $205 billion for highways and $48 billion for transit projects over five years, including $10 billion dedicated to a program to help relieve serious bottlenecks in freight movement. But Mr. Graves expressed concern that failure to raise fuel taxes meant $70 billion of the bill’s total had to come from other sources, which meant a future congress would have to grapple with a shortfall.
Ocean freight and barge rates down
Ocean freight rates for shipping grain from the Gulf to Japan averaged $23.22 per tonne in the first quarter, down 27% from the prior quarter, down 21% from the same quarter last year and 49% below the four-year average, the U.S.D.A. said. Freight rates from the Pacific Northwest to Japan averaged $13.30 per tonne, down 25% from the previous quarter, down 17% from a year earlier and 46% below the four-year average. Grain shipments from the Gulf to Europe averaged $11.65 per tonne, down 17% from the fourth quarter, down 16% from the first quarter of 2015 and 39% under the four-year average.
“Low ocean freight rates continued to be caused by excess vessel supply, falling commodity demand and a general global economic slowdown,” the U.S.D.A. said, citing Drewry Shipping Insight. Reduced shipments of coal and iron ore, the two largest users of bulk ocean freight, have pressured rates, especially Panamax vessels, which have spilled over to grain.
Attempts to curb excess vessel supply and boost rates near term by temporarily taking vessels out of service and increasing the retirement or scrapping of older vessels “has not been strong enough to raise rates,” the U.S.D.A. said, and scheduled delivery of newly built vessels, which is a long-term solution, has declined but still is sizeable.
“The outlook for iron ore and coal trade remains bleak,” the U.S.D.A. said. “It’s likely that ocean freight rates will remain low for a while.”
Barge freight rates also were down from a year ago, but volume was up. The Illinois river southbound barge freight rate in the week ended April 26 was $12.44 per ton, down 7% from a week earlier, down 34% from a year ago and down 26% from the three-year average, the U.S.D.A. said. Rates also were below year-ago and the three-year averages on the Mississippi and Ohio rivers.
Cumulative barge grain movement, meanwhile, through April 23 was up 14% from a year earlier for corn at 5,801,000 tons, up 7% for wheat at 465,000 tons, down 5% for soybeans at 3,595,000 tons, and down 37% for other grains at 52,000 tons.
It likely won’t be until next winter, if then, that there may again be cause for concern in grain transportation. In the meantime, fuel costs are expected to remain relatively low, and freight availability — whether truck, train, barge or ocean vessel — adequate to ample.