USDA Pegs Rail Losses at a Half-Billion Dollars

Upper Midwest farmers lost about $570 million on sales of soybeans, wheat, and corn last year because of painful rail delays that began with the bumper 2013 harvest and persisted into fall 2014. The snarl-up could lead to closer federal monitoring of railroads and impinge on selection of a successor to investor Warren Buffett, the Wizard of Omaha.

Growers in Minnesota, Montana, and the Dakotas were hit hard by railcar shortages and missed shipments because they rely heavily on railroads to move their crops. Railroads usually transport 80% or more of grain and oilseeds leaving Montana and North Dakota. In South Dakota, railroads haul 39%; in Minnesota, they haul 35%.

Based on depressed local prices and higher shipping costs, USDA economists estimate farmers in the four states were paid an average 17¢ a bushel less than expected for corn, 18¢ a bushel less for wheat, and 11¢ a bushel less for soybeans from January 1 to November 30, 2014, when compared with the previous three or four years.

“These lower commodity prices have a direct effect on farm income, reducing crop receipts for the season,” says USDA. Costs to farmers “could be as much as 3% of cash receipts, or about $570 million.” 

Storage bins were still clogged with leftover grain when harvest began last fall, driving up storage costs and lowering elevator bids.

Although service has improved, U.S. railroads are operating at nearly full capacity. Disruptions such as a spate of bad weather or a surge in demand “are likely to cause performance problems,” cautions USDA. South Dakota Senator John Thune says he will use his position as Commerce Committee chairman to look for long-term solutions.

The U.S. Surface Transportation Board, which oversees rail rates and service, will decide in coming weeks whether to require long-haul railroads to file weekly traffic reports. 

The reports are filed now under a temporary rule. The National Grain and Feed Association says a permanent rule “will be invaluable to rail users and their customers” by keeping a finger on the pulse of rail activity so trouble will be spotted early. 

Buffett, whose Berkshire Hathaway bought the Burlington Northern Santa Fe Railway in 2009, says BNSF, a major Midwest carrier, “disappointed many of its customers” in 2014 and will spend $6 billion this year, 26% of expected revenues, “a truly extraordinary amount,” on plant and equipment to improve its performance. 

Analysts note that BNSF chief Mark Rose, who’d been viewed as a potential successor to Buffett, was not mentioned in Berkshire’s annual letters to stockholders in late February.

The full USDA report on rail losses is here.