Drought Affects Grain Transportation
Date Posted: September 27, 2012
This article is reprinted from the USDA's Sept. 27 Grain Transportation Report.
This year’s drought in the United States has reduced crop yields and production in much of the Nation, affecting grain transportation on the Mississippi River and its tributaries and changing normal grain sources and destinations.
In addition, high grain prices have resulted in reduced ethanol production and animal inventories, which could result in a decrease in domestic grain demand for the year.
These changes are expected to impact both immediate and marketing-year grain transportation dynamics.
Crop size effects. Grain transportation demand for the 2012/13 marketing year will likely be lower than in recent years due to the drought-reduced corn and soybean crops.
Nevertheless, demand for grain transportation should still be substantial, given USDA expectations of the 2012/13 grain and oilseed crop to be the eighth largest on record. Grain storage capacity is expected to be adequate in most locations, because of the lower crop size and because the grain industry has expanded storage capacity over the last several years.
Corn, soybean, and wheatproduction during the 2012/13 marketing year are projected to be 10.2 percent less than the previous year.
Exports are projected to be 11.3 percent less than the prior year, which is expected to decrease rail and barge transportation demand more than truck.
Domestic use is projected to be 6.6 percent less than the prior year and will mainly decrease the demand for truck transportation.
Price effects. Relatively high grain and oilseed prices, combined with the current low carry1 in the market, is expected to encourage grain producers to sell at harvest or shortly thereafter.
This is especially true because prices for corn, soybeans, and wheat have recently reached record highs before the price receded during harvest.
Consequently, the immediate demand for transportation is increasing, as indicated by higher grain railcar loadings and secondary grain railcar bids.
However, the increased demand may be short-lived as 2012/13 corn supplies are expected to be down 1.5 billion bushels from last year and the smallest in 9 years.
High 2012/13 crop prices will allow agricultural producers or elevators with surplus grain to ship longer distances than they normally would to areas possibly facing deficits.
Agricultural producers ultimately absorb any increase in transportation costs because they are price takers in a highly competitive world market and are offered a price that is net of transportation costs.
All other things being equal, as crop prices increase, so does the amount of money that can be spent on transportation—particularly to reach more distant markets.
Higher crop prices will help mitigate drought-induced shortages across the country by enabling surplus regions to profitably ship longer distances and allocate crops among deficit regions.
Finally, higher grain prices are expected to result in animal feeders reducing their inventories, which in the short term will increase the total meat supply but in the longer term reduce animal numbers.
According to the September 21 USDA Livestock Slaughter report, the August production of lamb and pork was up 8 percent and 6 percent, respectively, from the same month last year, more than offsetting the 1 percent drop in beef production. In the poultry sector—the July poultry certified ready-to-cook was 4 percent higher than during the same month last year.
Similarly, high grain prices have squeezed ethanol plant profitability and are expected to result in less ethanol production than would otherwise occur.
According to the USDA analysis of the weekly Energy Information Administration report, the ethanol plant capacity utilization rate during August averaged 84 percent, down from 93 percent last August.
Shifts in grain transportation patterns.
During the September 13 Surface Transportation Board’s National Grain Car Council meeting in Irving, TX, railroads and grain elevators commented on the shift in origins and destinations due to the drought.
They indicated that some grain that would normally move west or south for export by rail is now moving east and north to domestic markets.
In addition, the quantity of agricultural crops transported by hired carriers may increase during the 2012/13 marketing year.
Unusually large regions in the United States have been affected by drought this year.
As a result, many crop-producing regions—that normally produce adequate crops for their own use or source from nearby regions—may need to transport crops from more distant regions this marketing year.
In typical years, producers in these regions haul directly to nearby domestic users.
This year, however, because the distances hauled will be longer, hired carriers will probably haul a greater proportion of crops to domestic users.
A shift in transportation modal shares may also occur this marketing year because crops will be hauled longer distances than in normal years, and the low water levels on the Mississippi River System have slowed waterborne grain traffic.
Many domestic users may be unable to obtain adequate quantities of grain and oilseeds from their primary and secondary suppliers due to widespread drought.
Thus, almost inevitably, new suppliers will be located further from the user than normal.
Because rail transportation is more cost-efficient for long hauls, rail transportation will gain market share from trucks, and possibly barges, until the Mississippi River System water levels return to normal.
Shifts in transportation patterns this marketing year are expected to be temporary as grain and oilseed production rebounds next year in response to high prices and more normal growingseason weather.
1 Market carry is the price difference between the future delivery month and the near term month and represents how much the market is offering the producers to hold (carry) the grain until the distant month. For instance, on September 25, November soybeans traded at $16.17 per bushel while May soybeans traded at $15.815. In this instance, carry is a negative $0.355 per bushel, which would encourage the producer to sell in November.
For more information, call Surajudeen (Deen) Olowolayemo, USDA, at 202-694-3050.