Adequate capacity during demand surges is key to export efficiencies
Reputation is the secret success of the U.S. soybean industry, and in an unforgiving international marketplace, distinction is achieved by getting product to customers with greater efficiency. A major pillar of that success is the U.S. railroad system.
In some parts of the country, almost all soybeans are placed on rail and shipped to the West Coast. Traditionally, it’s the western part of the Corn and Soybean Belt: North Dakota, South Dakota and western Minnesota—states with minimal processing capability coupled with weak local demand. North Dakota, for example, doesn’t have a single soybean processor. Without rail service, there would be a limited soybean crop because of the disconnect between supply and demand. Railways are the lifelines connecting farmers in the Upper Midwest with export channels.
In a transportation logistic system dependent on a single mode of transport, reliability can go down and costs can go up. With half of the U.S. soybean crop destined for export, a healthy rail industry, in tandem with strong waterway and trucking industries, ultimately benefits farmers.
The waterway and trucking industries are buttressed by government funds. There is some private financing of locks and dams; a new lock or major rehabilitation is cost-shared: Half is financed through the barge industry’s diesel tax and half is from the federal government. Everything else in the inland water system, as well as trucking and surface transportation system, is overwhelmingly financed by the federal government.
However, the rail industry is almost exclusively financed privately. Some states have grant or loan-guarantee programs, but those are minimal. Only a percentage is financed by the public sector. The soybean industry must push for a climate favorable for railroads to invest in their own system, says Mike Steenhoek, executive director, Soy Transportation Coalition.
“Legislators can’t impose an oppressive regulatory climate that results in railroads neglecting to invest in rural areas of the U.S.,” he says. “We must have an environment that’s favorable and conducive to railroads investing in their network and improving their net worth.”
On a per ton basis, waterways offer the cheapest transport. Rail ranks No. 2, followed by trucking as the most expensive.
According to Steenhoek, in 2013, the cost to move a metric ton of soybeans from Davenport, Iowa, to Shanghai was $100.45; but from Mato Grosso, Brazil, to Shanghai it was $150.79.
For U.S. soybeans headed for export, the truck component is the short, initial journey from farm to elevator or processor. “If a farmer is 70 miles or closer to three big rivers that accommodate grain exports (Illinois, Mississippi or Ohio)then the waterway system is logical and explains why 58% of soybean exports (67% of corn exports) leave from the Mississippi Gulf area. The Pacific Northwest ranks No. 2 with 25% of soybean
exports,” Steenhoek says.
However, a grower located further than 70 miles from the three major rivers can look at rail as the most competitive option. The trucking journey off the farm ends at a train and not a barge. From there, it’s a 1,400-mile rail journey to Oregon and Washington, taking five to eight days, depending on congestion.
Farmers know barge movement is cheaper per ton, but it costs more to load soybeans into an ocean-going vessel on the lower Mississippi River because of ultimate travel distance. The trip from the West Coast to China is shorter than the distance from the Gulf of Mexico to China—roughly two weeks as opposed to 30 days. The rail journey to the Pacific Northwest is more expensive, but the subsequent ocean journey is cheaper, forcing grain handlers to keep close tabs on rail, barge and ocean rates. As rates change, they serve as market signals, causing shipments to swell in either the Gulf of Mexico or the Pacific Northwest.
Soybeans aren’t the only commodity sent by rail—in 2013 the commodity was competing with other grains and crude oil for rail service, creating congestion in certain areas.
In the early part of 2014 through the spring, rail service faltered with oil and grain vying for space. A sizable 2013 grain crop, a harsh winter and competition from other industries (with an exponential increase in crude oil as the most notable) all contributed to the bottleneck. The congestion occurred in a concentrated area, but the interruption carried ramifications everywhere, creating an imbalance of supply and demand for rail service.
“Rail functions for the 2014 harvest have been much better than expected,” Steenhoek says. “We monitor the system and survey 42 grain-handling facilities every two weeks. The railroads acknowledge the need to expand investment into the network to accommodate increased demand. This is a dynamic that will feature on the radar screen for the foreseeable future.”
Brad Hildebrand, global lead for rail and barge, Cargill, agrees: “Railroads need to do a better job anticipating a pickup in demand across their network. If there’s one thing we’d like to see, it’s accountability by the railroad to make sure they have enough capacity and are ahead of the game in order to handle demand surges versus falling flat.”
Hildebrand believes railroads need to continue to invest in people, cars and infrastructure to provide greater dependability and expand capacity to handle additional volumes of traffic.
“Soybeans have to compete with other commodities moving on the rail system,” he says. “The railroads want to accommodate all products, but there is limited capacity to handle everything. Essentially, when capacity is reached, the railroads have to decide who gets what. Choices have to be made: What trains sits and what trains move?”
The U.S. transport system doesn’t only move grain from A to B at the lowest price-point; it’s also directly related to making sure grain arrives as customers expect. Brazil has massive soybean production but is shackled by a relatively primitive transportation system and long waits at port. Argentina benefits from production within 200 miles of ports but is afflicted with political strife, inflationary threats and labor unrest, resulting in unreliable grain movement.
“Any lid on our ability to move products to the world market turns us into a residual supplier compared with South America—which is growing increasing amounts of beans,” Hildebrand says. “Our window of opportunity to compete will shrink, and we’d better be there to hit those markets when the world comes to our shores and asks for product.”
Steenhoek believes U.S. soybean farmers grow the best product in the world, but says quality does not rule the international market. “We’re not like the electronics industry where we out-innovate our competitors. We’re producing a commodity that is overwhelmingly processed and fed to livestock. That means the ability to differentiate the product is limited. Differentiation for the U.S. is gained by getting the product to our customers better than our competitors.”
Steenhoek is keenly aware that it doesn’t take long for foreign customers to turn elsewhere. “Reputations take years to accumulate and moments to evaporate.”