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Grain transportation bottlenecks and prices
Poor transportation costs you. Grain shipping charges are normally built into the cash basis buyers pay for your soybeans, corn, and other grains. Though, for at least a year, little about U.S. commodity transportation has seemed normal.
In last spring’s high water, barges broke loose from a tow, damaging and temporarily closing the Marseilles Lock and Dam on the Illinois River. By early summer, Mississippi River locks in Illinois, Iowa, and northern Missouri shut down until water levels fell enough for safe passage. By the end of a dry August, the Army Corps of Engineers was dredging in low Mississippi water near Clinton, Iowa.
Other transportation issues lie ahead. To the north and west, a wet spring has delayed completion of rail improvements in North Dakota, which could cause temporary shipping delays this fall. In Washington state, a lingering labor dispute could challenge exports to Asia.
These and other potential bottlenecks worry Larry Hasheider, who farms near Okawville, Illinois, about 40 miles east of St. Louis and the Mississippi River.
Hasheider’s farm is only 2 miles from an elevator that ships corn to southeastern livestock markets on unit trains. Still, transportation problems on the Mississippi River affect him, too.
“If the rail didn’t have to compete with the river, I’d have a lower price, too,” says Hasheider, who is chairman of the Illinois Corn Marketing Board. “Whenever the river backs off, the rail backs off.”
That’s exactly what happened last winter, when the Mississippi was so low that the Army Corps of Engineers had to hire two contractors to blast rock pinnacles in the channel near Thebes, Illinois. Barges were already running partially loaded in the shallow water between St. Louis and the confluence with the Ohio River at Cairo, Illinois. Then, beginning on December 15, 60 days of work to clear the channel began, limiting barge traffic to eight hours each night. For the first time ever, some shippers moved grain to the Gulf Coast by rail – at a cost of 45¢ a bushel for corn, according to a study conducted by Informa Economics for the Illinois Corn Marketing Board and the Illinois Corn Growers Association.
That hit to cash prices might not have seemed huge, since December corn futures had spiked above $8 a bushel in July and were still around $7. The basis at Pekin and Peoria, Illinois, had briefly gone more than $1 over nearby futures in June last year, falling to almost even with futures by mid-December.
“If that had been a lock failure, that’s what would have been a real-world event to farmers,” Hasheider says. “It’s one thing to have 45¢ on $7 corn and another thing to have a 45¢ lower basis on $4 corn.”
Commodity groups and checkoffs have been working for years to get Depression-era locks and dams repaired and modernized – with only mixed success. After last year’s short crop and this year’s drought-shrunken carryover, the transportation system seems ready to revert to more normal patterns. Last year’s Mississippi River delays prompted farmers to store corn or sell to buyers other than river terminals. Hasheider and other farm leaders worry about the effect of a lock failure.
It could tie up the river for months, he says. Already, delays on the nation’s inland waterways aren’t that unusual. In 2009, a door on the main lock at Greenup County, Kentucky, on the Ohio River failed, and the lock closed for a month. Major repairs there closed it longer in 2012. Ohio River locks have smaller auxiliary locks that allow some traffic to continue during repairs, although at a slower pace. Most locks on the Upper Mississippi River above St. Louis don’t have a second way past the dam, so failure there could stop river traffic altogether.
No one knows exactly what that would cost corn and soybean farmers, but last year’s low water and rock blasting at the Pinnacles brought an opportunity to find out, with a real-world event instead of an economic study done with computer models. So the Illinois corn organizations hired Informa Economics in Memphis, Tennessee, to pin down the cost. Other corn programs in Iowa, Indiana, Missouri, and Wisconsin supported the project.
The study showed that the cost to divert shipments from barge to rail was a 45¢-per-bushel premium to barge rates. Grain merchants absorbed about 15¢ of that extra cost – on the smaller volume being shipped.
“We saw and heard that grain sat in storage,” says Ken Eriksen, the Informa economist who did the study.
There were other potentially more serious side effects, too, including fewer corn exports.
“The world market stopped coming to the United States,” Eriksen tells Successful Farming magazine. “You could see that when the sales plummeted. What volume we had the world needed, and we couldn’t move it.
“Infrastructure is everything,” he continues. “When you have a problem with infrastructure, what you get is inefficient capacity utilization. You have higher freight rates and lower farmer prices as a result.”
Although barge rates for dry commodities increased by more than 100%, they had even higher operating costs transporting grain, fertilizer, and other commodities in barges that couldn’t be fully loaded, Eriksen says. Those costs rose 180%.
“Everyone lost something in this process,” he says. “Were there any winners? Yeah, our competitors.” Corn exports were lost to Ukraine, Brazil, and other corn-exporting nations.
If there’s a bright spot in grain transportation, it’s the rail system. Railroads are investing in new track, locomotives, and other improvements in states like North Dakota, where the oil and fracking boom is creating new business. The American Association of Railroads reports a record 108,605 carloads of crude oil shipments in this year’s second quarter, double the amount of a year earlier. Railroads now ship more than one tenth of U.S. crude oil production. Yet, it’s still a small part of the railroads’ business.
“Crude oil is not going to cause the rest of the rail system to come to a standstill,” Daniel Keen, an economist with the railroad association told shippers at the annual National Grain Car Council held in Kansas City, Missouri, recently.
In fact, railroad commodity shipments have hit several low points. Coal, which accounts for 41% of railcar shipments, is at its lowest level since 1983 as that fuel loses electricity-generation business to cheaper natural gas, according to Keen. After the drought of 2012, rail grain shipments were the lowest since 1988, the association’s earliest year of grain records.
The Grain Car Council was formed by the predecessor of the federal surface transportation board to help shippers and railroads try to anticipate potential car shortages. As the nation prepared to harvest a bigger 2013 crop, that atmosphere in Kansas City was almost festive.
Eric Parthemore, CEO of Heritage Cooperative, a central Ohio co-op owned by 5,000 farmers, says instead of 120-bushel corn yields last year, Heritage members would harvest 170 to 175 bushels.
“After last year, I’m really looking forward to talking to our railroads and complaining about service problems,” he jokes.
There won’t be many.
Major railroads are making record capital investments, says Dan Mack, vice president of transportation and terminal operations for the cooperative CHS.
“That’s a very positive scenario. That trend has been that way for the past several years, and it continues to grow every year,” says Mack, who sees ample covered hopper cars, locomotives, and crews to handle the 2013 harvest.
There is a downside to the investment. The late spring in North Dakota has delayed some railroad construction projects, which could cause temporary shipping delays.
“That’s probably going to be with us, logistically, into harvest,” Mack says, and it won’t be only in the Northwest states. “Long term, it’s a positive scenario. Short term, we’re going to have some logistical constraints.”
Those constraints were confirmed by Frank Anderson, general director of ag operations for BNSF, which is spending $4.3 billion this year to increase capacity and flexibility. “These projects do have a temporary impact” on grain movement, he told the Grain Car Council.
Low water remains a concern, too, for another CHS employee, Chris Stringer, senior merchandiser.
“Anytime you have a period of sustained dryness, you have to be concerned going into fall,” Stringer says. “The Corps has a lot of tools at its disposal, but there really isn’t any substitute for precipitation.”
Almost as unpredictable as rainfall is a labor dispute between the International Longshore and Warehouse Union and United Grain in Port Vancouver, Washington, an export terminal on the Columbia River. Workers have been locked out since February 27, and management is running the facility, owned by the Japanese firm Mitsui. For a time, concerns about safety threatened to stop grain inspections.
“We do have concerns about the Pacific Northwest,” Bill Eilbracht, general director of logistics for Union Pacific, told the Grain Car Council. “We do expect it to go on for some time,” he said of the labor dispute.
Mike Steenhoek, head of the Soy Transportation Coalition organized by 11 state soybean boards, was a guest speaker at the meeting. He, too, said he’s following the labor dispute. Some 68% of railcars shipping soybeans go to Oregon and Washington, he said.
“That’s why that issue is very concerning to us, particularly on the eve of harvest,” he says.
Ken Eriksen at Informa agrees that the labor dispute could become more serious after harvest.
So far, wheat has been going through Port Vancouver with management running the terminal. Management has also been running rail transportation near the port, because railroad union labor won’t cross picket lines, Eriksen points out.
“We start piling on then, when corn and soybeans come out of there,” he says. That will be the test of whether management can continue moving grain into the port.
Except for the ever-present threat of a catastrophic lock failure, all of these transportation issues for 2013 – possible low water, railroad construction, and labor disputes – are likely to be minor, mainly because corn exports haven’t yet rebounded from the 2012 drought and transportation problems.
Yes, 2013 grain and soybean crop exports “are surging – to the third lowest since 1986-1987,” says Eriksen.
It’s the 2014 crop and beyond that could test the system, say farmers like Bob Bowman, who, with his son, farms near DeWitt, Iowa.
The rail system simply can’t replace barge traffic entirely, he says. “With a limited number of tracks, we couldn’t handle all of the grain out of the Midwest in a normal year,” says Bowman, who chairs the Iowa Corn Promotion Board and who also backed the Informa study of last year’s low-water event.
Grain flows are also changing. Last year brought unusual pressures, with corn moving from North Dakota to North Carolina, says economist Ross Korves of the Pro-Exporter Network.
“We saw one of those strange moves early this fall. With the harvest in Louisiana, we saw barges moving north with corn,” Korves says.
Bowman, who considers the Mississippi River (which is 20 miles to his east and south) his normal market, was instead selling soybeans just before harvest by trucking them an hour west to a Cargill soybean plant in Cedar Rapids, for a 64¢ improvement in basis over the river.
When the system settles back to more normal flows, it may be tested again. Phil Baumel, a retired Iowa State University economist who specialized in transportation, has looked at investment in river barges themselves. The fleet is down from about 12,500 barges in 2000 to just under 10,000 currently, according to Baumel and economist Eriksen. It hasn’t been a problem with low exports, but Baumel worries that it could be in the future.
Railroads, too, could come up short. Even with well over $10 billion a year in capital improvements, another $1.55 billion may be needed, according to a study by the Soy Transportation Coalition.
Farmers like Hasheider are convinced that the transportation system will face strains, even if it isn’t this year. With increasing yields and a Corn Belt that’s expanding, it’s inevitable.
“You have North Dakota producing more corn than Texas,” Hasheider says. Seed companies are developing short-season, 67-day corn that could bring in 8 to 10 million more acres of production in Canada.
“If we’re moving the Grain Belt that much farther north, obviously, we have to look at the transportation system, as well,” he says.