Slow go: Farmers, shippers concerned about impact of rail delays

Farm Forum

Ordinarily, Jerry Cope would be loading between 100 and 125 rail cars with grain at this time of year, moving outbound from Dakota Mill and Grain in western South Dakota to flour mills and birdseed processors on the East Coast. But the elevator, where he serves as VP for Grain Origination and Merchandising, sits on the Canadian Pacific (CP) rail line where he’s been “lucky” to see 25 cars that sometimes show up within two weeks of when promised.

“It’s really difficult to get some answers,” he explains while reviewing orders that have been backlogged for as much as three months amidst spiraling freight rates. “We need some honest give and take about when we are going to get some regular, predictable service.”

Uncertainty is a common complaint, echoed by elevators, ethanol producers and farmers across the country who are wondering if and when railroad companies will ever catch up from what most describe as a “perfect storm” of challenges this winter: extremely cold temperatures that limited capacity and slowed rail speeds, increased competition from domestic oil and coal shipments, and bottlenecks in key terminals like Chicago. But there’s also the pocketbook pinch that is starting to hit home, due to lack of timely access to rail cars.

“As a farmer in western Minnesota, I am faced with a substantial financial impact,” says Lance Peterson, a farmer director with the American Soybean Association (ASA) and the Minnesota Soybean Growers Association (MSGA). “Inadequate rail service directly drives up the cost per car by thousands of dollars and that’s reflected in the price I’m paid locally. Current basis is 60 cents wider than normal. New crop basis is 30 cents wider.”

Even though many of the problems seem to be surfacing west of the Mississippi River, Bob Dinneen, CEO of the Renewable Fuels Association, sees the financial impact extending much more broadly across the U.S. economy.

“The sheer chaos that is today’s rail system is denying consumers that price relief by driving up the transportation cost for and impacting the supply of ethanol and other commodities,” he wrote in a letter to Ed Hamberger, the CEO of the Association of American Railroads. “Nothing has changed with regard to ethanol production costs or efficiencies. The only change has been abject failure of the rail system to adequately address the needs of all of its customers.”

Farmers and ethanol producers joined several others to testify at a Surface Transportation Board hearing last week – providing regulators, the railroad industry and their customers a chance to discuss what is becoming an increasingly frustrating situation.

From its perspective, the STB says it has been closely monitoring the rail industry’s performance metrics and is concerned about service problems across the nation’s rail network, particularly on the Canadian Pacific Railway Co. (CP) and BNSF Railway Co. (BNSF) systems. The board members have written to and met with the leadership of BNSF and CP, who were also present at Thursday’s hearing.

Sen. John Thune, R-SD, who serves as ranking member of the Senate Committee on Commerce, Science, and Transportation, also weighed in with an April letter to senior BNSF and CP officials “to reaffirm my concerns and share the growing frustration from South Dakota shippers whose livelihoods depend on the ability to get bulk goods to market by a particular date.” In testimony before the STB last week, he provided several examples of the troubles that elevators and ethanol processors are experiencing.

For example, North Central Farmers Elevator, located in Ipswich, South Dakota, is a farmer-owned cooperative that serves over 2,500 producer-members in north and south central South Dakota. “Its Ipswich grain elevator placed a rail car order with Canadian Pacific on January 24, 2014, for hopeful delivery to its facility on January 27th. The cars arrived on March 17th, seven weeks late,” Thune explained.

“This late delivery was made even more frustrating by poor communication from Canadian Pacific, which failed to respond to inquiries about when the cars would arrive. The elevator in Ipswich faced significant economic hardships by these rail delays. When the January 27th cars did not arrive, the grain inventory at the facility reached capacity. In order to meet other outstanding contracts, it had to move that grain by truck to another railroad loading facility.

“Between January 27th and March 17th, it moved over 300,000 bushels of grain at a cost of 18 cents a bushel, or $54,000 in additional unplanned transportation expenses. Once at this new facility, it found the cost of rail service had also increased, due to scarcity, with a typical grain shuttle running $6,000 over tariff. These two unexpected costs equate to an additional $1.78 per bushel in unexpected expenses being paid not by the eventual purchaser, but by the farmers and elevator owners,” Thune added.

Heavy traffic, heavy snows

Many in the railroad industry say they are doing the best they can – given the wide variety of challenges they’ve faced.

“BNSF is not favoring crude shipments over other shippers like agriculture. This is a case of rapid growth for several commodities using parts of our railroad network that hadn’t previously seen that kind of volume,” says Amy Casas, director of corporate communications for BNSF.

Fifty percent of all the freight volume increases in the entire rail industry in 2013 occurred on BNSF’s network – 400,000 of 800,000 units, Casas said. The freight volume growth leader on BNSF was Intermodal (consumer products) traffic, not crude oil. Automotive and industrial products traffic also increased, as did volumes of coal and crude oil. Grain traffic also surged in late 2013 driven by compressed and overlapping crop harvests.

While crude oil and the promise of U.S. energy independence has been a game-changer for North America, it still only represents about 4 percent of total traffic on BNSF, Casas added. As demand for rail transportation increased, BNSF has been making new investments.

“BNSF made an industry record capital investment of $4 billion to improve our network and expand capacity, particularly in the Northern region of our network to handle growth. We also announced a new record 2014 capital plan of $5 billion in early February, with the largest portion of the expansion and maintenance capital again being made in the Northern Corridor,” noted Casas.

But will all of this investment, including bringing in extra crews, locomotives and equipment be enough for railroads like BNSF to eventually catch up to the demand?

Casas says “service improvements are beginning to occur and we remain focused and committed to restoring service to levels our customers need and had historically come to expect from BNSF. The good news is that there is nothing systemically wrong.”

A spokesperson for the American Association of Railroads pointed out that railroads are committed to “restore service to the high levels our customer expect and we deliver.”

“There have been recent rail service challenges in certain parts of the country and railroads are working around the clock to mitigate them. Those challenges result from a confluence of events that were concentrated in particular regions. These events include a winter that was far worse than usual and forced railroads to dramatically shorten train lengths and crew exposure to the elements; a record grain harvest and unexpected surge in grain exports; and higher coal volumes as utilities sought to replenish stockpiles they consumed when they generated additional electricity to keep all of America warm this winter.

“Despite regional service issues, railroads continue to move vast volumes of goods safely and efficiently. In March 2014, U.S. railroads originated nearly 39,000 more carloads and nearly 93,000 more containers and trailers than in March 2013. They transported higher average weekly intermodal volume than any in March in history and the fourth highest of any month in history. Average weekly U.S. rail carloads of coal in March were the highest in six months; carloads of chemicals (the category that includes ethanol) were the highest in 23 months; motor vehicles were the highest in 12 months; lumber was the highest in 67 months; and nonmetallic minerals were the highest in six months,” explained AAR’s spokesperson.

But Randy Gordon, President of the National Grain and Feed Association, isn’t so sure that significant improvements will show up any time soon.

“The eastern railroads will probably be back on schedule quicker, but it could be well into next year until the rest of the U.S. gets back to normal,” he explained.