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Corn+Soybean Digest

Railroad Ruckus

Even before Hurricane Katrina disrupted U.S. grain flow from Gulf ports this year, rural grain elevators and farm associations were complaining about inadequate rail service.

North Dakota's Governor, Agricultural Commissioner, Public Service Commission and 11 North Dakota agricultural groups sent a joint letter to BNSF Railway Company on Aug. 18 to protest decreased rail car supply and poor service. The letter states that “North Dakota's farmers and shippers are demanding fairer treatment from the BNSF in their ability to order grain rail cars. Recent actions by your company are causing great harm to your grain shipping customers, the farmers they serve, and our state's economy in general.”

Farm groups in other states have been complaining as well, and not just to the BNSF, says Pat Ptacek, executive vice president, Nebraska Grain and Feed Association (NGFA).

In July, the NGFA and four other state feed and grain associations sent a letter to Roger Nober, Surface Transportation Board chairman, reiterating previous complaints from the grain industry about insufficient rail car availability and service delays. (See sidebar, “Are regulators too chummy with railroads?” page 29.)

“Our state's rail service for the grain industry is chronically challenged and getting worse, both on the BNSF and on the Union Pacific,” says Ptacek. “Five out of the last seven years there's been pretty miserable service. In most parts of the state, there's only one railroad in town, and there's no competition. Overall, I'd give the railroads a D in service.”

At press time, Ptacek says rail cars were averaging two to three weeks behind schedule. “I don't anticipate it getting any better,” he adds. “There's a lot of corn hitting the market and the Gulf Coast markets are plugged up.”

Unusually bountiful U.S. grain production during the past few years has contributed to recent grain transportation challenges, concedes Mark Davis, Union Pacific (UP), regional director of public relations. “Five out of the last six years, we've had a very heavy harvest,” he points out. “That taxes the rail industry and other transportation modes as well.”

Despite those challenges, Davis says that “we are quite pleased with the results from last year.”

The Union Pacific also offers a different outlook on its rail service to the grain industry so far this year. “We're not behind, except on trains of 25 cars or less,” says Davis. “Unit trains, as of (Sept. 8) are doing well and being filled. Unit trains are experiencing normal cycle times. We are predicting a good harvest, and we are watching, waiting and ready to handle the harvest.”

The UP has allocated the same amount of rail cars to the grain industry as it did last year — 22,500 covered hopper cars, says Davis. However, he emphasizes that the UP has no plans to fill any grain transportation void that might develop this year due to damage to facilities in the Gulf from Hurricane Katrina.

“We will not stretch our capacity,” says Davis, “which is limited now.”

Overall, the UP's rail service to the grain industry is “going pretty well,” notes Davis at press time. “Consolidation of tracks and elevators, and the ability to move 75-100 cars vs. smaller units, has helped move grain more efficiently.”

Although not consistently on time, Ptacek admits that larger unit trains and shuttle loaders, those that can run 75-100 unit cars, have been getting better service. “They should be getting better service,” he says, “because they've paid a premium to get it. Most of them had to invest millions of dollars into their infrastructure to be able to load unit cars.”

Railroad service problems are less likely for grain elevators that have large unit train capacity, agrees Bob Zelenka, executive director, Minnesota Grain and Feed Association. However, both small and large facilities still deserve prompt service and a reasonable price, he adds.

“Railroads are about maxed out on their ability to provide service to the grain industry,” says Zelenka. “It's not an easy job. I'll grant them that much, but we expect better service than what we've been getting.”

Overall, railroad service to grain elevators was less than stellar both in Minnesota and other states in 2004, he says. This year, higher barge rates will likely stress rail systems even more, he adds.

“The recurring problem is that railroads are not interested in serving grain elevators that are less than shuttle capacity, says Zelenka. “Fifty-two-car, 26-car and single-car facilities are lucky to get service at all.”

Davis disagrees. “We're looking for ways to better serve our ag customers, and that includes one- or two-car shippers,” he says. “We will continue to work with ag customers at all levels, small or large.

“We've asked a lot of customers to coordinate and join together 25 cars in one spot, and many of them are doing that,” adds Davis. “However, you do get a little more delay that way vs. going with a unit train.”

Joining together one or two rail cars per elevator on small unit trains was just what the industry used to do about a quarter-century ago along the Nebraska Northeastern (NENE) Railway, says Tim Gubbels, owner/manager, North Side Grain Co., Laurel, NE. The NENE is a short-line railroad that joins BNSF's main line in Sioux City, IA.

“I'd love to have rail service again,” says Gubbels, “but no one wants to mess with single-car shippers any more, so we've evolved into a trucking house. Rail service would be cheaper than trucks, but we don't have that option. The railroads want something steady, and with the grain industry, they don't get it.”

At press time, fuel costs were running about 50-60¢/mile for trucking grain, says Gubbels. He adds that when fuel costs are high, the added transportation cost reduces the price that farmers receive for their crop.

“Maybe we should go to double and triple trailers to be competitive,” suggests Gubbels. “Our state doesn't allow it, but other states do.

“We need to be competitive with the railroads, and that would do it,” he adds. “In Nebraska, there's only the BNSF and the UP, and they each control their own monopoly. There's no competition, and competition is good.”

Over the long haul, trucks can't compete with rail, agrees Jerry Fruin, University of Minnesota Extension economist.

“Whenever you get away from a river, truck rates get much higher than railroads,” says Fruin. “Within 100-200 miles of a river, barges dominate. About 300-400 miles away from the river, you can't afford to truck it anymore, and railroads dominate.”

Economics also favor larger train sizes over smaller ones, notes Fruin. From an operational standpoint, it's simpler to run shuttle trains (100-plus cars) than smaller unit trains, he says. For example, it takes less time and manpower to coordinate and track one large unit train than several smaller ones.

On the other hand, “the grain business is going to be there for railroads, regardless of the rate,” says Fruin. “The railroads view their future as moving containers, not grain.”

Ptacek agrees. “The railroads are going to make more money on coal and intermodal shipments,” he says, “as opposed to serving the cyclical structure of agriculture.”

Not true, says the UP's Davis. “The ag market is a very important part of our overall mix,” he emphasizes. “We do care about the ag sector. Agriculture and ag products make up 14% of our revenue and it's one of six commodity groups that we serve.”

Still, if railroads really did care about agriculture, counters Ptacek, they would adopt a rate structure to reward farmers and grain elevators for shipping when the demand is low.

“The industry ought to be working together to develop an incentive program to encourage more year-round grain shipping to avoid the peaks and valleys,” he emphasizes. “Typically, everyone wants to ship at the same time, but the current railroad rate structure does nothing to encourage grain elevators to ship in off-peak season to level out these peaks and valleys of demand.”

More steady grain shipments would be welcomed by the industry, and that includes the Union Pacific, says Davis.

“Our customers are the ones who call the moves,” he says. “Everyone wants the better price for their product, and that's when things ship.”

Rail industry consolidation was supposed to improve service, not worsen it, emphasizes Ptacek. He notes that grain industry representatives have waited patiently for railroads to solve their service problems to farmers and grain elevator for several years, but that patience is now wearing thin.

“We've been biting our lips for a long time, hoping service would get better, but the frustration level has just gotten to the boiling point,” he says. “Since deregulation, the railroads have a certain public trust to uphold, and they haven't done it.

“Unfortunately, Congress may have to step in and set parameters on rates and rate structures,” Ptacek says. “That may include regulation of class-one railroads, if they can't adequately service customers, or allow short lines to haul on class-one rail lines.”

Steve Strege, executive vice president, North Dakota Grain Dealers Association, agrees. He says the BNSF needs to drop rates 25-30% to “get in line with commonly accepted standards of reasonableness, based on revenue to variable cost ratios.”

Railroads also need to make more grain cars available during the busiest times of year, he adds. The BNSF and other railroads sometimes claim up-to-date service, says Strege, when they simply fail to offer rail cars. “I guess you can't be late,” he says, “if you're not taking orders.”

He explains that for the heavy shipping months of August, September and October, the BNSF took certificate of transportation (COT) orders for single cars and trains up until June 20. Then, except for 1,000 single cars for October, they shut off further ordering for those three months.

“BNSF's COT auction for October trains ran for only a two-week stretch, from June 6 until June 20,” says Strege. “The tariff lottery system was also shut down for the last third of August and all of September.”

By artificially restricting the rail car supply in this manner, railroads such as the BNSF have run up the bids for both the COT auction and the secondary market, Strege emphasizes. He also points out that the state of North Dakota is currently working on a rate complaint on behalf of an unidentified shipper.

Suann Lundsberg, BNSF Railway Company media relations manager, says her company is constantly working to better serve the agricultural sector.

“Given this year's increased demand for car capacity generated by a simultaneous large harvest and old-crop supply push, and combined with the huge, across-the-board demand for our capacity, we are very proud of our service to North Dakota agriculture,” she says. “Year-to-date, BNSF has shipped 49,707 grain cars or 6.5% more grain from North Dakota than last year. And in August alone, we shipped 7,200 grain cars from North Dakota, which is 30% more than last year.

“This would not have been possible without the efficiencies realized from the over $144 million investment in North Dakota facilities by our customers and BNSF's $420 million capital investment in new, high capacity, grain covered hopper cars,” Lundsberg adds.

“This demonstrates our continued commitment to serving all of our North Dakota customers. And our goal is to continue to maintain adequate service levels to all of our customers and meet the demands of the growing agriculture industry,” she says.

Yet, Strege says that BNSF's failure to offer adequate rail car auction offerings for an extended period this year has also inflated secondary market bids.

“Some cars sold here recently for $800-1,000 over the tariff rate,” says Strege. “On a standard tariff rate of $3,000 per car, that's a 33% increase in rate. When the railroad sees that, it tells them that they can raise rates. But the only reason they can do that is because they have a monopoly.”

In response to such charges, Kevin Kaufman, BNSF Railway Company group vice president for agricultural products, says that “BNSF has not shut down the ability to order grain rail cars. During the August, September and October offerings for non-shuttle Certificates of Transportation and tariffs, all customers were awarded cars for the month requested or the following month.”

Kaufman adds that “BNSF does not engage in restricting car supply to manipulate market bidding We offer the freight that we have available and then the market place decides its value. And because we have to make capital plans well in advance, these decisions are made months ahead of the actual auction and delivery periods.”

Are Regulators Too Chummy With Railroads?

When Roger Nober, Chairman of the Surface Transportation Board (STB), sent a letter to railroad executives on June 15 of this year, he offended many in the grain business by complimenting the railroads for their service in 2004.

Nober sent the letter to request plans on how railroad executives would handle peak fall demand in 2005, but it included one, particularly offensive sentence, according to five state grain and feed associations. It stated: “I am pleased that despite the unprecedented volumes tendered to the railroads during the 2004 fall peak season, the railroads were able to handle these demands without any significant degradation of system fluidity and performance.”

Such a statement is a far cry from reality, “and the STB was informed of that,” countered a letter sent to Nober on July 6 by the Grain and Feed Association of Illinois, the Minnesota Grain and Feed Association, the Nebraska Grain and Feed Association, the North Dakota Grain Dealers Association and the Texas Grain and Feed Association. The letter stated instances of rail car orders being “40-50 days behind.”

Since then, Nober has agreed to meet with grain and feed associations at an upcoming railroad industry forum, says Bob Zelenka, executive director, Minnesota Grain and Feed Association. However, at press time Zelenka says he's still disappointed in Nober's words and actions.

“We wouldn't expect a regulator to get so chummy with the industry he is supposed to be regulating,” he explains, “but that appears to be the case.”
John Pocock

Will Specialty Grain Markets Suffer?

Recent increases in railroad rates on the BNSF are destroying specialty grain markets, according to Bob Zelenka, executive director, Midwest Shippers' Association, Minneapolis, MN.

“The BNSF railroad increased their containerized bulk grain rate and also implemented a general rate increase on grain in their contracts with the steamship lines about six months ago,” Zelenka says. “The steamship lines, in turn, contract with container shippers, who were assessed this new surcharge as a pass-through that amounted to an additional $220 per 20-foot container.”

The alternative of trying to keep specialty grains segregated when shipping in regular grain hopper cars is impractical, says Zelenka. Bagging specialty grains before shipping is another option, he adds, but it's too expensive.

“It doesn't make sense to discourage specialty grain movement in bulk containers with this ocean-carrier bulk-grain surcharge, which has resulted from the increased railroad rates,” says Zelenka. “The surcharge just adds insult to injury and has no basis other than profit taking by the railroad and, to a much lesser degree, profit taking by the steamship lines.”

Suann Lundsberg, media relations manager, BNSF Railway Company, disagrees.

“BNSF realizes the value of supporting the transportation of bulk agricultural commodities in international containers, and is committed to this business,” she says. “BNSF does not have a surcharge for bulk grain. The rate is the rate. The only surcharge we have is a fuel surcharge.”
John Pocock

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