Basis Gets a Boost

July 31, 2009 02:47 PM

Drive the nation's highways this summer and you can't help but notice railcars parked on sidings. In the short term, less competition for freight is helping farmers and grain handlers (see "Silver Lining" below). "There's all sorts of excess capacity in the transportation industry now," says Jerry Fruin, University of Minnesota ag economist specializing in transportation. "But a year from now, as carriers contract, things might be dif-ferent" as carriers consolidate.

"Class I railroads have idled more than 200,000 railcars due to the recession," says Matthew Rose, BNSF chairman, president and CEO. His company alone has 43,000 railcars parked. "My biggest problem right now is finding a place to store all this stuff," Rose says.

Many privately owned railcars are out of service as well, says Ken Eriksen, Informa Economics senior vice president for transportation. And when railcars are parked on privately owned sidings, the railroads pay daily storage fees of $3 to $20 per car, he says. "On a monthly basis, that can be more than a car leases for."

Even with excess cars, railroads have not yet significantly dropped tariffs, Eriksen notes. "But with lower fuel costs and therefore lower fuel surcharges, rail rates actually paid are lower on an annual basis."

On the Roads. Trucking companies have likely been hit even harder. "There probably are 600,000 too many trucks in the system," says Eric Starks, president of Freight Transportation Research Associates. "The public guys are shedding equipment rapidly. It's somewhat alarming.

"Truckload rates have been coming down," he adds. "Through 2010, it'll be difficult for these guys to push rates up because there's plenty of capacity out there to move stuff."

On the Water. Ocean rates to ship grain from Gulf and Pacific North-west ports are currently less than half what they were a year ago.

Barge rates also have declined. "You've got fairly weak barge freight rates, and it will probably be that way for the foreseeable future," Eriksen says.

Due to the recession, grain is about all that is moving on barges right now, except for some fertilizer coming northward along the Mississippi River, Eriksen notes.

Depending on how long demand stays weak, operators may take railcars, towboats or ships out of service, hoping to preserve some rate stability. That will tighten up the capacity, Eriksen says. "Then, if you get a snapback in the economy and we get things going really hard, we could see some accelerated freight rates just because we've got stuff moving again."

Silver Lining for Farmers

Basis has improved through much of the Corn Belt, reports Kevin McNew, president of "We've seen basis levels return to what we used to think of as normal in the early 2000s. Farmers are not having to bear the impact of high transportation costs, so they've won in that sense," he says.

As the map shows, weaker barge rates have helped raise basis levels, especially in the Illinois and Ohio River regions, where rates fell 40¢ in the past six months (Mississippi River rates fell 20¢).

"Another reason Eastern Corn Belt basis has strengthened more than the Western Corn Belt is because corn use for ethanol has been sluggish," McNew says. That may turn around in 2009/10 because of new ownership of some key VeraSun plants, energy prices moving higher and corn prices dropping, he says. Acres also may be up more in the Western than the Eastern Corn Belt.

"Looking ahead for fall, barge rates are contracted at levels we were accustomed to last year when prices were still high," McNew says. "My gut says that those will come down when we get to harvest, so I think basis levels should be fairly favorable this harvest."

Top Producer, Summer 2009

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