Grain Rail Service Update
Date Posted: August 7, 2014
This article is reprinted from the USDA's Aug. 7 Grain Transportation Report.
Railroad service to grain shippers suffered severely last fall and winter and has only recently been improving.
These problems are centered on the Canadian Pacific Railway (CP) and BNSF Railway (BNSF).
Many of the problems are caused by capacity limitations on the rail network.
This is a two-sided issue involving greater-than-normal demand from shippers of coal, oil, intermodal, and grain for rail service simultaneous with rail carriers’ constrained ability to provide service at a normal level.
Even though rail service is improving, lingering service problems, the backlog of grain shipments, and the size of the approaching grain harvest cause grain shippers and producers to be concerned about whether there will be adequate transportation and storage.
Grain shippers are concerned that the remaining old-crop grain will not be shipped before the large influx of new-crop grain overwhelms available storage.
In response, shippers have been securing guaranteed railcar service at high premiums through the secondary railcar market and directly from rail carriers in the primary railcar market, essentially doubling the price of rail service in September and October.
On June 20, due to the slow pace of rail service recovery, the U.S. Surface Transportation Board (STB) required CP and BNSF to submit plans to address their grain backlogs and provide weekly status reports of progress until the situation is resolved.
STB stated it was concerned about the remaining time before the next harvest.
Rail carriers have indicated service problems may continue into 2015 while ongoing track work continues, reducing system velocity.
While BNSF has made significant progress in reducing its backlog of grain shipments since the STB announcement, it is unclear to what extent CP will address its backlog
Grain Car Backlog
BNSF has made steady improvements in service and is expected to work through its grain car backlog by October.
CP, however, continues to experience problems and may not be ready for the upcoming harvest.
As of July 31, BNSF reports that it has reduced the backlog on past due grain car deliveries to 4,066 cars at an average of 19.9 days late.
In North Dakota, BNSF reported 2,399 grain cars were an average of 21.3 days late; in Montana, 660 grain cars were an average of 23.5 days late; in Minnesota, 468 grain cars were an average of 23.5 days late; in Nebraska, 188 grain cars were an average 11.4 days late; in Kansas, 118 grain cars were an average 11.2 days late; in South Dakota, 105 grain cars were an average 17 days late.
In the past six weeks since the STB’s directive, BNSF has reduced its backlog of past due grain cars by over half. BNSF has stated it should have its backlog of grain cars moved by October 1, in time for the upcoming harvest.
However, at its current rate of recovery, BNSF may clear its backlog even earlier.
In contrast, CP has stated it does not have an accurate idea of how large its backlog is, complicating efforts to estimate whether it can clear its backlog within the remaining time before harvest.
As a measure of its backlog, CP shows the open requests on its network for grain cars.
This is an indication of how much grain shippers wish to move in each State.
As of July 31, CP shows there are 22,457 requests for grain cars in North Dakota that average 11.71 weeks late and 7,193 requests in Minnesota that average 12.43 weeks late.
This is only a slight improvement over the past 6 weeks, when requests were 23,818 in North Dakota and 8,426 in Minnesota.
These two States account for almost all the reported outstanding requests on CP’s network.
This is due in part to the recent sale of CP’s main line in South Dakota between Tracy, MN, and Rapid City, SD. CP purchased this section of track in 2007 from the former Dakota, Minnesota, and Eastern Railroad and sold it on May 31, 2014 to Genesee & Wyoming Inc. (G&W).
G&W has created a new short line railroad, the Rapid City, Pierre, and Eastern Railroad (RCP&E), to serve this section of track, which includes many grain shippers.
Rail service to grain shippers along the RCP&E in South Dakota has reportedly suffered as ownership of the line has changed hands.
CP fulfilled only 1,186 grain car orders in the past week for North Dakota, 210 for Minnesota, and 391 for the RCP&E in South Dakota.
Excluding any new requests that may occur as the 2014 harvest begins, it would take CP another 17 weeks at this rate, or until late-November, to eliminate its backlog of grain cars.
By this time, the 2014 harvest will be nearly complete, and there would probably not be enough storage space for both crops, especially in South Dakota.
Some States may not have sufficient storage capacity for the upcoming grain harvest.
While this is true every year, the situation is compounded by: (1) the amount of remaining grain in storage in each State, (2) the number of backlogged grain cars, and (3) low corn prices that are not encouraging grain to be moved.
The graph below gives a rough estimation of the excess or shortage of grain capacity this October based on June 1 grain stocks by comparing the grain storage capacity last October to grain stocks as of June 1 last year.
Grain production in 2014 for each State is estimated to be very similar to last year.
These nine States represented almost 70 percent of last year’s grain harvest.
Grain stored on the ground in Nebraska and South Dakota will be especially vulnerable to rail service problems as these States are far from barge-loading facilities, making them particularly rail dependent.
Primary and Secondary Railcar Markets
Bids in the primary railcar market have been trading at historic highs since late May for guaranteed railcar placement for grain shipments.
Bids for the week ending July 31 ranged between $2,500 and $3,300 per car (approximately between $.68 and $.91 per bushel) for BNSF’s guaranteed grain car placement in October.
This is a stark contrast to the previous 10 years, which have had very little monthly trading and bids that rarely exceeded $700.
Most trading occurs in the secondary railcar market where shippers reallocate previously reserved space among themselves as market conditions change.
Shippers worry about a repeat in rail service problems at harvest and are securing space directly from rail carriers this year.
Unlike premiums paid in the secondary railcar market, which are transferred between shippers and do not affect railroad profits, premiums paid in the primary market accrue directly to the rail carrier.
Bids in the secondary market are trading in a similar price range for service placement from August through December.
The next two months will be a critical period for railroads to move the remaining grain backlog in anticipation of the projected record harvest this year.
Although BNSF has shown promising signs of recovery over the past month, outstanding shipments on CP continue to cause concern for grain shippers and producers.
For more information, call Surajudeen (Deen) Olowolayemo, USDA, at 202-694-3050.