Rail delays put California farms at risk

Foster Farms forced to suspend feed distribution of feed for tens of thousands of dairy cattle and tens of millions of chickens and turkeys due to rail service failures.

Bloomberg

January 12, 2023

6 Min Read
FEED DELAYS: Weather hurdles compound existing rail service challenges, leaving farms with no option other than trucking in grain to keep livestock alive. Bloomberg

Millions of chickens have gone unfed as rail disruptions delay corn shipments to a California poultry farm, according to documents that provide unique details of how one shipper has suffered from poor rail service. 

Foster Farms, which processes about 1 million chickens and 12,000 turkeys every day, has said it’s had to pause some operations because of delays from Union Pacific Corp., the second-largest freight railroad in North America. 

The supply issues also forced the company to shut down a plant that processes raw corn into animal feed to sell, it said in federal filings. That meant cutting off its dairy farm customers from corn meal and giving priority to its chickens, which start killing each other when they go hungry.

After a flurry of correspondence that offers unfiltered insight into shippers’ problems with rail service, the U.S. Surface Transportations Board ordered Union Pacific on Dec. 30 to deliver more corn-laden trains to Foster Farms.

This is the second time in the past year Foster Farms has asked the rail regulator to intervene directly because of Union Pacific’s failure to deliver animal-feed trains on time. It’s also the latest in a long-simmering tussle between shippers and railroads, which have seen profits rise even as carloads dwindle.

“These service failures, which began in February 2022, have resulted in numerous instances where Foster Farms has suspended its production and distribution of feed for tens of thousands of dairy cattle and tens of millions of chickens and turkeys,” the company said in a letter to the regulatory agency.

Bloomberg

Credit: Bloomberg

Suppliers like Foster Farms complain they have no viable alternative to using rail and can be captive to one carrier. Disturbances to these operations could potentially risk supplies for major food retailers including Costco Wholesale Corp. and Walmart Inc., which stock Foster Farms products.

The Livingston, California-based processor, which is owned by Atlas Holdings LLC, says it is the largest chicken grower in the Western US, with about $3 billion of annual sales. It said it resorted to hauling supplies by truck, but couldn’t find enough capacity and faced soaring costs. It takes 400 trucks to handle the same amount of grain as one 100-car train.

Foster Farms declined to comment beyond statements in public filings.

“Union Pacific is working closely with Foster Farms, providing daily updates and delivering the trains addressed in the order,” the railroad said in an emailed statement. “We continue to experience significant weather delays, including washouts in California, blizzards in the Midwest and rockslides in Nevada.”

Michael Booth, an STB spokesperson, said: “The Board is reviewing all relevant information and determining if further action is necessary.”

Service breakdown

Union Pacific has been at the forefront of a recent nationwide rail service breakdown that has plagued all carriers including Warren Buffett’s BNSF Railway Co., its closest competitor in the West, and CSX Corp. and Norfolk Southern Corp. in the East. Railroads have pointed to difficulties hiring train crews since the pandemic hit, along with usual disruptions such as weather and derailments. 

Shippers and unions say the problems began with an industrywide cost-cutting push about five years ago that slashed workforces, closed switching yards and parked locomotives. The five largest U.S.-based rails had a 7% drop in carloads versus a decade ago. Under an efficiency strategy known as Precision Scheduled Railroading introduced in the US in 2017, the railroads revamped customer schedules and slashed costs.

“You can only cut so far and they’ve already cut more than they should have, especially as far as employees,” said Daniel Elliott, a principal with GKG Law and a former chairman of the Surface Transportation Board. 

The decline in carloads over the last decade coincided with a windfall for the railroads. Net income for the five largest carriers jumped by 75% over the past 10 years. Adjusted operating profit margins rose to a record 41% in 2021 from less than 16% two decades ago.

After successful deregulation legislation in 1980 that rescued railroads from the brink of bankruptcy, carriers became more productive and improved service, allowing profits to rise as shipping rates fell. A wave of consolidation that also followed reduced the large railroads operating in the US to seven from about 40, transforming the competitive landscape.

The railroads’ power to affect service to its customers makes shippers hesitant to publicly criticize rail companies, according to trade groups. The American Fuel and Petrochemical Manufacturers said in a Dec. 15 written testimony that its members are “fearful of potential backlash” and one declined to provide service information for the STB’s hearing on Union Pacific “since such testimony could be linked back to their company leaving them vulnerable to retaliation or other subtler recourse from UP.”

The Surface Transportation Board is seeking to correct the imbalance, but has limited power. In December, it called on Union Pacific to explain a spike of service-limit notices designed to alleviate network congestion.

“It’ll be interesting to watch what happens over these next couple of years and see if the railroads do take a little bit of a turn” in their strategy, Elliott said.

‘Every minute now counts’

December was the second time last year Foster Farms ran so critically short on corn supplies that it turned to the board for help. In June, the company filed a petition for emergency service after months of struggling to get enough trains. Desperation began to creep into the communication between the railroad and its customer as animals went unfed. 

“We are about to kill millions of chickens,” said Phil Greene, vice president of Foster Farms, in a June 14 email to a Union Pacific executive. “Every minute now counts as we try to save lives. You have never put us in this situation 5 days late with no inventory and 40 to 50 million chickens to feed.”

The next day, Foster Farms filed its petition for an emergency service order. The railroad replied to the petition by accepting blame for poor service and proposed a plan to divert locomotives and crews to increase the trains. Chief Executive Officer Lance Fritz weighed in to spur action.

A Union Pacific locomotive at a rail terminal in California.

“Foster Farms is a vitally important Union Pacific customer. However, we have failed to provide adequate service to Foster Farms,” Fritz said in a June 16 letter to the regulator. “I am writing to convey Union Pacific’s firm and clear commitment to providing Foster Farms the service it deserves and the service we expect to provide.”

On June 17, the board unanimously granted Foster Farms’ petition, directing Union Pacific to supply the required trains and report on their status for 30 days. After the 30-day period, the board declined to extend the order. By October, Union Pacific again wasn’t providing enough trains to keep corn stocks fully replenished, Foster Farms said.

The winter storms in December exacerbated the problem and Foster Farms again had to truck in grain in attempt to feed its and customers’ livestock. This time Union Pacific blamed the weather. The board on Dec. 30 ordered the railroad to deliver five grain trains that Union Pacific said would arrive by Jan. 3.

“With the exception of one train, UP did not deliver the five trains on the schedule it represented to the Board and to Foster Farms,” the poultry producer said in a Jan. 4 letter.

© 2023 Bloomberg L.P.

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