WASHINGTON — Two major events have challenged grain and agricultural product shippers in recent months — significant though brief disruptions to grain exports from the Texas Gulf resulting from Hurricane Harvey and rail delays caused arguably by operating changes implemented at CSX Railway. Meanwhile, the harvests of large corn and record soybean crops should increase demand for transportation services seasonally over the next several weeks, although 2017 combined corn, wheat and soybean production is down from 2016, as are combined export forecasts for 2017-18, which should ease the overall demand for transportation services.
Historic rainfall exceeding 50 inches from landfall of Hurricane Harvey and repeated landfall as a tropical storm on the Texas Gulf coast in late August resulted in widespread flooding that “reduced rail service along the Gulf coast and all but halted regional grain exports through the first week of September,” the U.S. Department of Agriculture said in its September Wheat Outlook. The U.S.D.A. noted that the situation was “particularly impactful” on wheat as an average of 46% of total U.S. wheat exports ship from Gulf ports in Texas and Louisiana, and export elevators in Houston, Galveston and Corpus Christi account for 56% of Gulf wheat exports.
“For the week ending Aug. 31 there were virtually no wheat inspections reported for Gulf ports due to the shutdown of rail and port operations,” the U.S.D.A. said. “For the week ending Sept. 7, no wheat was inspected for export at either South Texas or East Gulf ports, while North Texas inspected a relatively modest 50,318 tonnes of hard red winter wheat, down from 160,512 tonnes for the same week in 2016.
“An indicator of the resilience of the regional transportation system, inspections at the Mississippi river ticked up to near pre-storm levels for the week ending Sept. 7 and aided to lift cumulative Gulf area inspections to 132,792 tonnes.” The U.S.D.A. said the disruptions from the storm were not expected to reduce total wheat exports for the year.
Conditions improved markedly as railroads worked to repair tracks, and rail shipments to the Texas Gulf mostly had recovered by the end of September.
“Thanks to the incredible work of countless teams, today the majority of service has been restored,” the Union Pacific Railway said in a Sept. 7 customer notice. “At the height of the storm, 1,750 miles of track were out of service and 2,440 route miles were affected.”
The BNSF Railway restored service to all of its subdivisions impacted by Hurricane Harvey by mid-September but noted that customers may face delays as track and signal work continued.
Kansas City Southern restored service to all of its subdivisions by Sept. 9, and noted on Sept. 13 that all embargoes had been lifted, although delays were possible due to speed restrictions and order backlogs.
Low river levels slow barge traffic
In contrast, low water levels on key barge routes slowed traffic in late September and early October and caused barge freight rates to surge, according to the U.S.D.A.
“Low water conditions have impacted barge movements on the Mississippi, Illinois and Ohio rivers, forcing barge operators to decrease drafts for barges, which is reducing barge cargo capacity,” the U.S.D.A. said. Spot barge rates on Sept. 26 for export grain from major originating areas rose 27% to 50% from a week earlier, U.S.D.A. data showed.
“In addition, harvest pace is slower than average,” the U.S.D.A. said. “At this early harvest stage and with adverse navigation conditions, elevated barge rates could continue well into mid-October.”
The U.S.D.A. added that delays on the waterways shifted grain to rail, pushing up weekly rail car deliveries of grain to the Mississippi Gulf for the week ended Sept. 20 by 148% from a week earlier.
Corn harvest in the 18 major states was 17% completed by Oct. 1, behind 23% at the same time last year and 26% as the 2012-16 average for the date, the U.S.D.A. said in its weekly Crop Progress report. The soybean harvest lag was not quite as great with 22% of the crop combined by Oct. 1 compared with 24% last year and 26% as the average.
Total year-to-date shipments of grain through early September were above year-ago levels, the U.S.D.A. said, despite adverse weather conditions and other factors. Barge grain movement as of Sept. 9 totaled 29 million tons, up 16% from the five-year average. Ocean-going grain vessel loading in the Gulf and Pacific Northwest also were above year-ago levels. Rail car loadings of grains were up 3% from the same period in 2016.
“However, demand for grain transportation may decline in the coming months relative to previous years as U.S.D.A. forecasts a drop in corn and wheat production and exports,” the U.S.D.A. said.
The U.S.D.A. in September forecast 2017 corn production at 14,184 million bus, down 6% from record outturn in 2016, and soybean production at a record 4,431 million bus, up 3%, and estimated all wheat production at 1,739 million bus, down 25%, with cumulative production at 20,354 million bus, down 6%. Corn exports in 2017-18 were forecast at 1,850 million bus, down 19%, soybean exports were forecast at 2,250 million bus, up 4%, and wheat exports were forecast at 975 million bus, down 8%, with aggregate corn, soybean and wheat exports forecast at 5,075 million bus, down 8% from 2016-17.
Ocean rates, fuel prices up from 2016
Ocean freight rates for shipping bulk grain also were above year-ago levels, although slightly below peak levels earlier in the year, the U.S.D.A. said. The rate for shipping bulk grain from the U.S. Gulf to Japan was $40 per tonne in early September, up 31% from a year ago but down 1% from the April peak. The rate for shipping from the Pacific Northwest to Japan was $21.50 per tonne, up 30% from a year ago but down 3% from April.
“The rate increase was partly due to strong grain movements and grain vessel loading activity,” the U.S.D.A. said.
Year-to-date grain (corn, wheat and soybeans) inspected for export from all major ports was 87 million tonnes, up 8% from last year and up 29% from the five-year average, even though total exports for the year are forecast below year-ago levels.
“The bulk (ocean) shipping market could not sustain the rally that occurred during the early part of the year, as excess vessel supply persists amid lagging demand for moving bulk materials,” the U.S.D.A. said.
Fuel prices got a boost from Hurricane Harvey as numerous refineries on the Gulf coast were temporarily shut down. U.S. average on-highway diesel prices reported by the Energy Information Administration of the U.S. Department of Energy had been on the rise since late June and peaked at $2.80 a gallon the week ended Sept. 15, up 34c from June 30 and up 40c, or 17%, from a year earlier. As a result, rail and truck fuel surcharges were above year-ago levels. Diesel prices began to ease in late September as refineries resumed normal production but held above year-ago levels.
U.S.D.A. data show that second-quarter total landed costs (cost of grain and all types of transportation) from the Upper Midwest to Japan both via the Pacific Northwest and the Gulf for corn were up just slightly from a year ago and for soybeans were down slightly as lower grain prices mostly offset higher freight rates.
CSX changes exacerbate grain markets
The CSX Transportation Co. (CSX or CSXT) implemented a new operating plan called Precision Scheduled Railroading (P.S.R.) under the leadership of new president and chief executive officer Hunter Harrison earlier this year. In June CSX users began to notice increased rail transit times, unreliable switching operations, inefficient car routings, poor communications with CSX customer service and acute disruption to customers’ business operations. In July the problems prompted an outcry from grain and other industries seeking government intervention to improve rail service from CSX. Initial responses from CSX further heightened tensions and angered employees and stakeholders in some cases.
The Department of Transportation’s Surface Transportation Board (S.T.B.) has held weekly calls with CSX management on the issue since July and requested additional performance data and other information on a regular basis.
In a July 27 letter to CSX the S.T.B. outlined its concerns about “disruptions in rail service from CSX’s implementation of changes to its operating plan.” In an Aug. 14 letter, the S.T.B. expressed “continued concerns over the widespread degradation of rail service across the CSX Transportation, Inc. system,” noting that “it is not apparent to the board or interested stakeholders that service is improving” since the July letter.
On Aug. 17 a letter from the Agricultural Transportation Working Group of the American Bakers Association and 17 other groups representing a wide cross section of agriculture commended the S.T.B. for actions taken to date and urged the board to “aggressively continue its recent efforts to examine the underlying reasons for the precipitous, deteriorating rail service being provided by the CSX Transportation Co., and to press the CSXT for its plan to rectify the harm it has caused to its customers over the past few months and restore service to levels that comply with CSXT’s statutory obligations.” Several of the letter’s recommendations appeared to be included in later communications to CSX from the S.T.B. and the U.S.D.A.
In an Aug. 24 response to the S.T.B.’s Aug. 14 letter, Mr. Harrison noted CSX has provided additional requested metrics to the S.T.B. and also published them on the CSX web site, among other efforts.
“Since beginning the P.S.R. conversion process, we have undertaken profound, transformational changes,” Mr. Harrison wrote. “Since fundamental change cannot be implemented while working from two separate operating plans, the changes occurred over a short period of time to effectively realize the benefits of the new P.S.R. plan. Changes of this magnitude tend to give rise to temporary challenges. We recognize that congestion has impacted traffic flows at various western corridor terminals during parts of July and August, and intermittent service issues have occurred elsewhere on our network. CSX has been and will continue to aggressively address remaining congestion, and has renewed efforts to inform customers during our implementation of P.S.R.
“Going forward, we expect our hard work on terminal efficiency, traffic flow adjustment and transit time to bring about enhanced service.
“This is a dynamic time for CSX, our customers, shareholders and employees. CSX is working tirelessly on its operating plan, asset utilization and deployment of resources to provide profound and lasting benefits for stakeholders — all enabled by the hard work and dedication of our valued employees. I remain confident that as CSX implements its P.S.R. model, customers will receive a markedly superior service product.”
On Aug. 16 the S.T.B. updated several Senate and House committees and subcommittees with an interest in the issue, saying that Mr. Harrison “indicated that internal metrics are showing that service in some areas is improving, and that he expects further noticeable improvements to be more evident after Labor Day,” but noting that “such improvements were not yet apparent to the board or interested stakeholders,” and that “CSX should carefully review its plans affecting the Chicago gateway, given Chicago’s key role in the national rail network.”
The S.T.B. rescheduled a public listening session on the CSX rail service problems to Oct. 11 from Sept. 12 due to Hurricane Irma. CSX said it would take part in the session, as will customers of the railroad and others.
A letter from Agriculture Secretary Sonny Perdue to S.T.B. acting
chairman Ann Begeman on Sept. 7 offered support for the S.T.B.’s actions to improve the CSX situation and provided four recommendations:
First, the U.S.D.A. said CSX should provide metrics on train speeds, car orders and equipment available by corridor, especially for lanes serving origin points in the Midwest to the Northeast, south Atlantic and South. CSX also should provide dwell time data for many more locations that are important to agriculture, making a distinction between unit, shuttle and manifest trains.
Second, the U.S.D.A. said CSX should better explain its methodology in calculating existing data, noting that CSX grain cars loaded and billed are uncorrelated with CSX grain car loadings, while other railroads correlate the data. CSX should modify its methodology so its data is similar to that of other railroads.
Third, the U.S.D.A. encouraged the S.T.B. to investigate CSX grain car order data and methodology, noting that during the winter disruption period in 2013-14 the number of outstanding orders “was a powerful indicator of the magnitude and location of problems,” but CSX does not provide unfilled order data as do other railroads.
Fourth, the U.S.D.A. said CSX service data should include a longer history than the prior year included currently to account for seasonal variations, which require at least two years to benchmark.
“The transportation delays and inadequate rail service that agriculture is now experiencing may ultimately lead to supply chain breakdowns,” Mr. Perdue said in the letter to the S.T.B. “Milling operations rely on consistent deliveries of wheat to make sure flour used in consumer products and commercial bakeries are entering their major operating period for the year. Nationwide, the peak of this year’s grain harvest will soon be upon us, adding to the demand for rail transportation. The convergence of seasonally driven grain transportation demands and the CSX service reductions could make U.S. agriculture less competitive in the global marketplace or cause prices to rise for consumers. I request the board to encourage CSX to communicate clearly and frequently on the location and timing of service changes, helping agricultural shippers better plan production and transport schedules.”
The winter months always bring challenges to grain shippers, with massive delays in rail service during the winter of 2013-14 still a fresh memory. At least this year overall transportation demand should be less, due to smaller total crop production and exports and as farmers hold more of their crops due to lower prices.