Co-op investment tightens basis, but venture is not risk-free
For a group of farmers in western Minnesota, pooling resources to create their own rail hub is a big risk that has paid off—to the tune of a double-digit basis improvement. Several years ago, producer members of three co-ops pledged assets to develop Agassiz Valley Grain LLC. Today the private company, located in Barnesville, Minn., loads 110-car unit trains with grain and sends them to Fargo, N.D., via the Ottertail Valley Railroad short line. The trains then head to the West Coast on the Burlington Northern Santa Fe (BNSF) rail line, en route to Asian markets.
"For soybeans, it’s meant a change in basis of as much as 20¢," says Rick Maier, a Barnesville producer. Maier is a designated member of the LLC board from the Rothsay Farmers Co-op, of which he is also a board member. Rothsay is one of three co-ops that formed the LLC along with Archer Daniels Midland.
Besides the LLC tightening the basis for producers who sell grain to it, the formation of the unit train facility also means other grain buyers have had to tighten their basis to stay competitive.
Corn, soybeans and spring wheat are shipped on the trains. Rothsay Farmers Co-op pledged its Barnsville elevator as its investment in the LLC. Maier says the decision wasn’t easy.
"We were giving up part of our business," he says. "Our co-op, Rothsay Farmers Elevator, was 105 years old. We’ve been building it a long time."
While Maier’s co-op pledged assets, the other business partners pledged a total of $1.5 million, $500,000 each, in cash.
|"For soybeans, it’s meant a change in basis of as much as 20¢," says Rick Maier of the new unit train facility his co-op joined.
Backs Against the Wall. Maier felt his co-op didn’t really have much of a choice but to go all in. He and other board members found their backs against the wall because rail lines would no longer accept co-loaded rail car shipments.
After losing the ability to put grain on railcars in Barnesville, the co-op had become little more than a stopover trucking station, says Maier, who grows corn, soybeans, sugar beets, wheat and barley. "We were losing profit," he notes.
As a result, the boards of the three co-ops were convinced they needed to jointly invest in a unit train facility capable of shipping on the BNSF rail line.
"If we wanted to stay in the grain business, this was our only option. We saw this as an opportunity, which has led to tighter basis," Maier says. "It has increased competition."
While Agassiz Valley Grain has been successful for Maier and the other owners, there are risks that producers, co-ops and elevators considering such ventures should be aware of, says University of Minnesota economist Jerry Fruin.
"This has been going on for 20 years," Fruin says of unit train installations. "There are cases where co-ops have put in train loading facilities designed for 25 or 50 cars, and the co-op down the road puts in one for 100."
The worst-case scenario is a co-op creating a "white elephant" that operates at only 50% or 70%
capacity, he says. As a result, Fruin explains, farmers have their capital tied up in an investment that is not performing.
Fruin says he is not against the concept of unit trains; rather, he just wants farmers to be aware that investing hundreds of thousands of dollars in them is not without risk.
Ethanol Plants Can Create Risk. In addition, the economist says, if the co-op is smaller, it might get squeezed by a larger co-op because the larger elevator typically sets the basis for the region. This might be good for prices, but it’s bad for an elevator that has just invested in a unit train facility.
Another risk, Fruin says, is the chance of a new ethanol plant being built nearby and taking away the co-op’s market. While the ethanol plant might be good for local prices, it can be bad for the local co-op elevator and the export market the unit train facility was supposed to capture. This, in turn, can hurt the investment of farmer-owners who have just invested a lot of money.
None of the potential risks have come to fruition for members of Agassiz Valley Grain, however. By any measure, the LLC has undergone amazing and profitable growth since it was formed in June 2006, in part because of equal parts pledged by ADM and three local elevators: Kragnes Farmers Elevator, Rothsay Farmers Elevator and Farmers Elevator of Fergus Falls.
From the start, the members of Agassiz Valley Grain kept their purpose front of mind: To load 110 railcar unit trains of grain on the BNSF Railway, primarily to export to elevators in the Pacific Northwest that load ocean-bound vessels for export to markets in China, Japan and Korea.
The LLC’s shuttle car loader is more efficient, both for railroads and grain elevators, says Dan Noreen, general manager of Agassiz Valley Grain. "A shuttle loader is designed to load out a 110-car unit train in 12 hours or less," he says. "This equates to more than 460 semi-trucks at a rate of 39 trucks per hour."
Economics Have Changed. In addition, Noreen says, the economics have changed. Due to the explosion of the Asian market, a huge investment in infrastructure by railroads and additional investment in West Coast grain facilities by large grain companies, it has become more advantageous to ship grain via rail from the Western Corn Belt than down the Mississippi River.
|A shuttle car loader is more efficient, both for railroads and grain elevators, says Dan Noreen, general manager of Agassiz Valley Grain. "A shuttle loader is designed to load out a 110-car unit train in 12 hours or less. This equates to more than 460 semi-trucks at a rate of 39 trucks per hour."
Agassiz Valley Grain is not the only LLC that’s investing in 110-car shuttle trains. More than 20 other projects have been built or are in the works in North Dakota, South Dakota, Minnesota and Nebraska since 2010.
One reason why shuttle loaders are so important for this part of the country is that corn acreage has rapidly expanded in recent years and literally stretched the Corn Belt west. The current infrastructure was built for small grains, which have much smaller per-acre yields. Furthermore, this region of the country does not have ready access to the nation’s river system arteries, which has been a substantial deterrent to reaching vital export markets.
Agassiz Valley Grain has expanded every year since its inception. In 2007, an 800,000-bu. outside storage bunker addition was completed, and in the fall of 2008, the company invested in a 1 million bushel flat storage building. In the summer of 2009, a 190,000-bu. steel tank was added in conjunction with doubling the truck receiving capacity of the facility. In the summer of 2010, the grain drying capacity was doubled along with tripling the wet grain storage capacity.
This year is the first time since the LLC opened that no new brick and mortar has been added. The LLC did add a card reader system to make data collection and truck scaling faster and more convenient for farmer customers, though.
Maier says the LLC has become such a popular destination for the grain of area farmers that it has been undergoing some growing pains. He has heard producer complaints about long line waits to unload their crops.
"It’s sort of like the ‘Field of Dreams’—if you build it they will come," he says.
However, the LLC can only invest so much in facilities at a time, he says. "The new grain dryer still can’t handle all the grain," Maier notes. "Many farmers don’t understand the other side of grain issues, such as dealing with railroads, labor and OSHA [Occupational Safety and Health Administration]. It’s been a real learning experience."
- November 2011