Future of Small Grain Elevators, Northern Crop Competitiveness Hinges on Rail Reform

Captive rail customers point to the 1980 Staggers Act that deregulated rail service as the root of today’s problems.  When it was passed, there were over 40 Class I railroads competing for business. Today, after over 50 mergers and consolidations, there are seven Class I railroads, and four of them control over 95% of railroad business, with three controlling over 70% of grain movement.

Imagine booking reservations at a restaurant, weeks in advance of an important dinner.  You even elect to pay more for the meal to assure a table.  You arrive at the restaurant on the eve of the big event, only to wait in the lobby for hours until you get a table. Your frustration mounts as you watch preferred “frequent diners” walk in off the street and get a table ahead of you. Finally, you are served – and after the meal, the waiter informs you that menu prices are going up.

Such an outrageous situation would never happen in the restaurant industry, where plenty of competition would assure that a place with such shoddy service would soon go out of business. That’s not the case for the railroad, however, whose real-life service to many smaller grain elevators in the past year mirrors this restaurant illustration.

Burlington Northern Santa Fe accounts for about 70% of grain shipped from North Dakota by rail, with Canadian Pacific accounting for the remaining 30%.

Like other major rail carriers, BNSF and CP employ a forward contract for grain elevators to guarantee rail cars up to six months ahead of when they’re needed, for a fee.   Grain elevators don’t like the fact that these contracts (BNSF’s are called Certificates of Transport, or COTs) pit one shipper against another for a limited rail car supply. But they’ve learned to live with them, since the COTs should at least give shippers the assurance they’ll get cars when they’re needed to ship grain – at least in theory.

Not last year, however.  Grain shippers who ordered 26 and 52 car unit trains from BNSF with COTS still found delivery of the cars 30, 40, even 50 days late. Meanwhile, the grain shipper incurs mounting interest costs, lack of storage space, and the risk of losing business with grain buyers. There is no penalty on the railroad or price break for the shipper if cars are delivered late.  If the shipper is late in getting cars loaded, however, there is a $50 “demurrage” charge.

Adding salt to the wound: BNSF’s 110-car shuttle trains were running on time.  “CP was running behind with their cars too, but at least they were treating elevators the same; everybody was getting cars late,” says Steve Strege, executive director of the North Dakota Grain Dealers Association.

It’s clear BNSF is giving preference to the 110-car shuttles, which it deems “more efficient.”  Strege speculates BNSF’s eventual goal is to downsize service to branch lines or rid itself of them altogether some day. He also points out that larger unit trains may be efficient in moving some bulk grain, but not many specialty grains (including durum, hard red spring wheat, and malting barley), with a number of mills and grain users, especially domestically, that do not have the interest or storage capacity to buy large amounts of grain.

Excess U.S. rail rates and poor service makes U.S. grain less competitive for export as well.  A new study at North Dakota State University indicates that freight is the leading non-tariff trade barrier for N.D. ag commodities, according to a survey of ag commodity shippers (see the study online at http://agecon.lib.umn.edu/cgi-bin/detailview.pl?paperid =13044).

The study authors report: “Complaints include high freight rates and unavailability of cars. These problems put N.D. exporters at a disadvantage compared to exporters from Canada and other parts of the U.S. In addition, one exporter said that the quality of hopper cars is very poor and that the railroad assigns exporters the responsibility of repairing them. These repair costs became an additional, major expense for exporters. Another respondent remarked that it is very important to maintain a viable local hub for export containers. One business reported hiring an individual specifically to deal with railroad issues.”

Oh, and by the way, BNSF plans to raise its rates, likely about a dime per bushel, which would ultimately be passed down to the grain producer.

It’s no help that the U.S. Surface Transportation Board, the federal agency responsible for overseeing rate and service disputes between railroads and shippers, the sole source of administrative oversight, has a skeleton crew. STB members are appointed by the President and confirmed by the Senate. The STB is authorized to have three members, and today has only one member (Roger Nober), who may be hesitant to address any major decisions with only himself as the STB’s regulatory body.

Captive rail customers point to the 1980 Staggers Act which deregulated rail service as the root of today’s problems.  When it was passed, there were over 40 Class I railroads competing for business. Today, after over 50 mergers and consolidations, there are seven Class I railroads, and four of them control over 95% of railroad business, with three controlling over 70% of grain movement, according to a National Association of Wheat Growers backgrounder on rail competition (online at www. wheatworld.org/html/library. cfm, click on “rail competition brief.”

“Consolidation has led to states, regions, and entire industries becoming captive to a single railroad.  This level of concentration and lack of competition was never envisioned by Congress,” the NAWG says in the rail brief.

The NAWG and other industries are lobbying for passage of The Railroad Competition Act of 2003 (H.R.2924, S919), which would go a long way to ensure a much needed improvement in the transfer of grain and other commodities, and even more important, provide an element of competition back in the U.S. rail system.  The very future of many smaller grain elevators, and the competitiveness of northern-grown farm commodities, may depend on this legislation.