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Power Hour: Rail Woes Hammer Basis

June 20, 2014
By: Ed Clark, Top Producer Business and Issues Editor

This spring, severe rail car shortages in the northern reaches of the Corn Belt widened basis an additional 50 to 75 cents in some cases—a double whammy for farmers when combined with lower crop prices. Although the problem has diminished somewhat, the backup remains well above historical norms.

Power Hour Noon LogoIn the period from late winter to early spring, it took one to two months for elevators to secure rail cars as demand far outstripped supply, causing the lease price for rail cars in the secondary market to skyrocket. The latest data from one major shipper, Burlington Northern Santa Fe, show the wait has been reduced to 26 days. That’s an improvement, but the figure remains well above levels from a year ago, when there was virtually no delay at all, says Stu Letcher, executive vice president, North Dakota Grain Dealers Association.

Basis for corn, soybeans and spring wheat widened from about 40 cents to 80 cents when comparing this past winter and spring to the benchmark year of 2009-10. That cost the state’s farmers an estimated $66.6 million in January and April alone, says Frayne Olson, ag economist from North Dakota State University who has studied the issue.

"The potential exists for additional losses unless the situation improves," Olson adds.

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Olson used the 2009 crop year as part of his calculations because the size of the crops in that year resembled those of 2013. He multiplied basis differentials and his projections for the volume of grain shipped. The narrow basis of 2012 isn’t a good measure, Olson explains, because that year’s crop was greatly reduced by the drought and basis levels were unusually narrow.

The hit on basis resulted from a combination of delayed deliveries for preordered rail and the large premiums paid for rail cars in the secondary market, "which doubled what some elevators had to pay," he says.

No quick fix is in sight.

"A lot of people want to blame the oil industry for the problem, but it’s more than oil," Olson says.

Even without the development of the Bakken oil fields in western North Dakota, there would have been a rail car shortage this year, Letcher adds.

The issue has been most apparent to producers in the northern Plains because of their reliance on rail for shipping grain to Asia via West Coast ports.

"But it’s not a North Dakota issue, it’s a national issue," Letcher says. "North Dakota is landlocked, but South Dakota and Minnesota are facing a similar issue." Even producers in northwest Iowa are affected because they also must transport their commodities over great distances, Olson notes.

From a global perspective, the transportation challenges are not as severe as those faced in countries such as Brazil. But American producers still pay a price because higher costs hurt U.S. competitiveness in global markets.

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