Railways downsized during the last recession but are now having trouble adjusting to new reality of booming freight demand
CHICAGO, Ill. — The U.S. grain transportation system that has been the envy of the world for decades is suddenly in trouble, according to two experts.
“It’s very vital to the agriculture industry that this transportation system works smoothly, and most years it does,” said Brian Schouvieller, senior vice-president for agricultural business with CHS, the largest agricultural co-operative in the United States.
“Most years you don’t hear anything about logistics and transportation. That has not been the case in the last couple of years.”
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He gives the rail system a D grade as it struggles to recover from recession era cutbacks.
Railways went from hauling 17.4 million cars per year before the global economic meltdown to 13.8 million in 2014. They cut crews, engines and cars during the recession, and it is proving difficult to add them back as the U.S. economy heats up.
In the meantime, grain faces stiff competition from oil, coal and intermodal traffic.
Weather problems have also contributed to longer cycle times and higher costs for grain shippers.
“This fall during the peak of harvest, rail cars at one time went for $4,000 per car,” Schouvieller told delegates attending the DTN Ag Summit 2014.
“That’s $1 per bushel, so transportation is a big deal.”
Ken Eriksen, senior vice-president for transportation with Informa Economics, said the petroleum industry is using 16,000 rail cars per week compared to 6,000 four years ago because of increased demand from the Bakken oil fields and other shale oil producers.
There has also been a huge uptick in intermodal traffic, which gets top priority from the railways.
Coal has dropped one million car loads per year from its peak in 2008, but that traffic could be coming back.
“You think it’s bad now, you throw another million cars back onto the network and things get all the more tight,” he said.
Demand is way up at a time when railway performance has eroded. Average Class 1 train speeds are five to six km-h slower than the three-year average due to line congestion.
Railways will spend $20 billion this year while attempting to fix the problem. They are buying new locomotives, building sidings, replacing or improving track and doubling their lines.
However, there isn’t much more room for improvement. Double-tracking is coming to an end because of the high cost of land and difficulty getting environmental permits.
The industry expects to be at full capacity across the entire network by 2035, which is why railway companies are starting to support and promote the inland waterways as an alternative method for getting commodities to port position.
Schouvieller gives a grade of C plus to the waterway system, which has been beset by weather-related problems. Severe drought dried up portions of the system two falls ago, and flooding caused problems the following spring.
“Those kinds of events really turn a barge company on their ear,” he said.
Schouvieller said the fix for the river system is easy compared to rail.
“The vast majority of the river system has the ability to handle more traffic. There are three pinch points that require minor investment to increase the capacity of the river system by as much as 50 percent,” he said.
“The problem is for a water system run and operated by the Army Corps of Engineers, who is going to make that investment? Right now, no one in the government is willing to put money towards that.”
Eriksen said the river system needs a capital injection of $18 billion over the next 20 years, which is a drop in the bucket compared to the $20 billion a year railways are spending.
Barge freight rates have fallen from their record highs this past summer, but traffic will pick up again as seven million tonnes a year of fracking sand soon starts moving by river from Mississippi to Texas.
“That is going to compete with grain head on,” said Eriksen.
So much crude oil is moving down the river system that all new vessels are tank barges and there are no new covered hopper barges to move grain.
Shipping crude down the river also requires more crew members than it does to transport grain, which is causing a labour shortage.
Rail and rivers have their problems, but it is the road system that deserves the failing grade.
The estimated cost to improve the country’s highways is $170 billion per year. Governments are currently spending $91 billion per year, which doesn’t even cover the cost of maintaining roads in their existing condition, he said.
One in nine bridges are structurally deficit, and one in four are functionally obsolete. The average age is 42 years old, and 30 percent of bridges have exceeded their 50 year lifespan.
“Think about that the next time you go over a bridge,” said Eriksen.
Schouvieller said 10 percent of truckers left the industry between 2008 and 2012. Hours of service rules have cut the labour force by another five to 10 percent at a time when demand is exceeding supply.
