Climbing fuel prices spur “rail renaissance”

Cattle Market & Farm Reports, Editorials
Dec 3, 2008
Climbing fuel prices spur “rail renaissance”

Railroads are going through what industry leaders like to call a “rail renaissance” that has tipped the scales of long-haul shipping in favor of rail over trucks.

The numbers bear that out as well: 2006 and 2007 were the highest volume shipping years on record for the railroad industry, according to the Association of American Railroads (AAR).

Spurred by high fuel prices, shippers are abandoning semi-trucks for rail cars. Such a renaissance tends to spur conflict with longtime customers, notably in agriculture. After all, farmers have been fighting with railroads for about as long as the two have co-existed.

The Golden Spike was driven into the ground in 1869, and by the 1870s, the National Grange movement became a political force in agriculture, largely by taking on the railroads.

Railroads are critical to rural America. Grain elevators, processors and ethanol plants always considered it a competitive advantage to locate on a rail line. But rail space on major carriers is going to become the hot commodity in the future. A study commissioned by AAR last year projected that rail freight tonnage would increase 88 percent by 2035. Meeting that demand will also require a projected $148 billion in infrastructure improvements nationally by the railroads as well. Communities that have relied on rail will face greater competition for train space, which likely will lead to more complaints about captive shippers and lack of competition in the countryside. “The problem we are seeing is that in a lot of areas where there is no competition in rail, it seems those people are kind of at the mercy of whoever serves those areas,” said Hereford, TX, farmer David Cleavinger, president of the National Association of Wheat Growers. “Any time you have captive rail and there is not an adequate market for determining what the rail rates are, then producers are usually at a disadvantage.”

The Government Accountability Office (GAO) examined rail competition in 2006 and cited the problems shippers have in communities without adequate competition. For instance, Sioux Falls, SD, is served by two Class I railroads while Minot, ND, is served by one. The rail rates around Minot are “roughly double the rates served by the Sioux Falls route,” the GAO states.

One problem grain elevators increasingly face is the shift to unit trains. Railroads don’t want to stop along a line to pick up a handful of hopper cars from a grain elevator. The large carriers want a full line of rail cars. Unit trains are more efficient and cost effective, but that efficiency for the rail line shifts the cost over to producers who have to haul grain farther by truck to get to a grain elevator or rail terminal where unit trains are being put together.

“Our grain elevator in Hereford wasn’t large enough for a unit train,” Cleavinger said. “Now, we have to haul the grain from Hereford to Amarillo, truck it in to the terminal.”

That also puts more pressure on smaller elevators that no longer can provide services to the local farmers. “It’s been difficult for the smaller grain elevators to compete,” Cleavinger said. “As with any industry, you get fewer and fewer people bidding for your products.

So then you get no competition, not only for the railroad, but in some areas there is not a lot of competition for your grain.”

The relationships between railroads and shippers are complex. Between the railroad and shipper, several different companies may own the rail cars being used for a haul. Logistics companies may work months in advance to line up just who gets which rail cars and when. Problems can occur when a grain elevator suddenly finds its grain volume has boomed because of an unexpected bumper local crop. Producers in states such as North Dakota and Oklahoma are frustrated. They cite captive-shipping problems as symptoms of a declining rail infrastructure.

“It became acute this year, but it’s been a chronic problem over the last several years,” said Mark Hodges, executive director of the Oklahoma Wheat Commission. “We have infrastructure that basically needs to be reinvented. Some of it is past repair.”

Earlier this summer, Oklahoma grain elevators had railcars promised for wheat that the railroads couldn’t deliver. The problem was a lack of locomotives when the grain elevators needed them most, Hodges said. “There were promise dates, but in some cases it was six weeks before they got them,” Hodges said. “The problem is ag is pretty low on the railroads’ priority list.”

With a larger-than-normal crop, elevators had no way to move it out. So wheat, priced at $8, $9, or $10 a bushel, sat in piles.

“It’s one thing when you have got $3 wheat and putting it on the ground,” he said. “When you have got $9 or $10 wheat, that’s a whole different issue then.” The problems with rail and agriculture in Oklahoma are severe enough that the Oklahoma Legislature commissioned an interim study to start this fall that will examine possible solutions for rural communities.
Hodges said one possible solution would be the development of more short-line railroads in the state that could take advantage of delivering ag products to more than one major railroad.

Overall, higher demand for service has put railroads in an elevated negotiating situation and they are responding by raising rates and rationing service, said Mike Steenhoek, executive director of the Soybean Transportation Coalition which formed in part because of farmer issues with rail service.

“We shouldn’t be surprised if we start seeing demand for freight movement bumping up against capacity to carry it,” Steenhoek said. The Soy Transportation Coalition is conducting a study on basis levels for the past five years and examining the correlations between basis levels and transportation at particular locations.

The RAND Corp. finished a study in August examining rail freight capacity. The report spotlighted the fact that freight shipments in the U.S. are expected to grow 70 percent in 30 years.

Railroads are expected to pick up even greater levels of volume to relieve highway congestion. But railroads have fewer than half the track miles than in decades past, suggesting the rail industry won’t be able to handle the higher volumes.

To meet the demands for higher freight traffic, an industry study last year projected the industry would have to invest $148 billion in capital costs.

Railroads expect they can generate the revenue to cover as much as 90 percent of those costs “because it’s in their business interest to do so,” said. Kelly Donley, a spokeswoman for AAR. Railroads argue that increased private investment on their part creates several public benefits. Highways are crowded, while more trucks mean more pollution and continued higher demand for fuel. “So moving freight by rail as opposed to truck has certain public benefits for the environment, for fuel efficiency, and for congestion mitigation,” Donley said. A popular stat quoted by the rail industry is that a modern locomotive can move one ton of freight 436 miles on a gallon of fuel, four times more fuel-efficient than trucks.

“So you can make a case there are public benefits to moving freight by rail,” Donley said. “If that is the case, then certainly incenting the rail to move more freight by rail is in the public interest.

Therefore, that makes a case for the tax incentives to spur railroads to build more capacity to move more freight.” However, giving public money to railroads for infrastructure can open up a whole new can of worms.

For instance, officials in Montgomery County, VA, now plan to sue state officials for spending $50.5 million in state highway money for a Norfolk Southern terminal that would expand capacity for freight traffic.

Most of the money will go for highway expansion that local residents oppose. The state argues the project will spur economic development while taking more semitrucks off the road. The RAND study also spotlighted an issue raised by GAO when GAO examined rail capacity. If rail is going to be part of the publicpolicy debate on transportation, then more public data is needed. Railroads provide only minimal amounts of information to Federal Railroad Administration, citing proprietary concerns over information. RAND stated that analysis of railroad transportation is “hindered by a lack of publicly available, detailed, and accurate data.” GAO also said railroads won’t discuss longrange investment plans in any detail because the information is proprietary.

Donley disputes the argument that the railroads don’t share enough information. She said railroads have worked aggressively in recent years on major terminal projects with state and local governments, reflecting that the public-private partnerships can benefit the railroads and the general public.

“The people who best know where the business is and where the business is coming from and where the business needs to be expanded are the railroads,” Donley said. “There’s a marriage between the public need and the private need.” Policymakers are turning more attention to rail infrastructure.

There are bills in Congress to both re-establish more regulation over railroads as well as provide more tax incentives for railroads to invest in track, terminals and locomotives.

There also are proposals to create a railroad trust fund to help pay for railroad investment. Spurring rail infrastructure also is seen as a way to reduce dependence on foreign oil by moving more goods over rail than semi-trucks. The railroad industry also frequently cites the statistic that a train capacity can equal the capacity of 280 semitrucks.

All told, the U.S. had about 164,291 miles of railroad in 2005, divided among the various classes of rail lines. Rail lines have seen an almost constant level of rail abandonment since 1955 when the country had 350,217 miles of rail line, according to AAR. The seven largest railroads in the country, the so-called Class I carriers, collectively own 95,502 miles of rail, but the major railroads concentrate the bulk of their business on about 52,000 miles of rail line. Attempting to learn more about captive markets, GAO also recommended the Surface Transportation Board (STB) do more research on the state of competition nationally and pricing practices in specific markets, as well as consider actions “associated with the potential abuse of market power.” STB disputed the proposal, stating it was based on inconclusive findings and would divert too many agency resources. STB is reforming some policies to attempt to deal with pricing issues, STB officials stated in the report.

Cleavinger said STB has been largely ineffective in helping rural, captive shippers. STB is the final arbiter in rate disputes against rail lines. The problem is that rate cases are often more expensive than the benefits that can be gained by winning the lower rate. GAO stated in its view that while STB has tried to improve its protections, “there is little effective relief for captive shippers because STB’s standard rate relief process is largely inaccessible.” It can take about $3 million to litigate a case. — DTN