Rail Fail Costs Add Up

August 25, 2015 12:13 PM
Rail Fail Costs Add Up

Waiting a few minutes for a train to pass by might just seem like one of life’s inevitable little annoyances. But the magnitude of these inefficiencies actually costs farmers millions of dollars every year.

That’s a summary of the opening argument from a study by the American Farm Bureau Federation (AFBF), authored by grain analyst Elaine Kub.

The “seemingly small irritations” of rail inefficiencies pounded farmers’ wallets in 2014, according to the study. That’s because grain elevators in the Upper Midwest were faced with unusually high rail freight costs, often $500 to $8,000 more than tariff per rail car. That extra expense was often factored into basis values, meaning farmers absorbed the bulk of this cost—ranging from an estimated 14¢ to $2.28 per bushel.

“Due to how grain markets work, it is almost always the farmer who ends up taking the loss in reality,” Kub writes. “Grain companies don’t ship grain unless the transaction is profitable, and end users can scale back demand if the final price creeps too high.”

Although the exact losses can’t be calculated, USDA estimates overall farmer losses could have topped $570 million, or about 3% of total cash receipts. For example, if the average North Dakota farmer sold 60,000 bu. of corn, and transportation costs weakened basis by just 17¢, that adds up to a $10,000 loss when compared to shipping grain in a more normal freight environment.

The study suggests a bigger U.S. pipeline capacity would help ease current rail shipping burdens. The proposed Keystone XL pipeline, for example, would have a carrying capacity of about 830,000 barrels of oil per day. That’s the equivalent of 11 shuttle trains, five 15-barge tows or 4,053 trucks.
“[A pipeline expansion] would take crude oil off the rails and, in doing so, improve the overall efficiency of the transportation system,” says AFBF chief economist Bob Young.

In the meantime, farmers and the entire ag industry continue to be at the mercy of rail service providers in certain regions, particularly in the Upper Midwest, Kub says.

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