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Railroad Logjams Threaten Boom in the Farm Belt

Scott Kilman and Daniel Machalaba Staff Reporters
The Wall Street Journal, December 1, 2003

Delays in Grain Shipments Reduce Potential Profits,
May Affect Overall Economy

In a harbinger of potential snags across the U.S. economy, a sudden boom in the farm sector has combined with shortages of railcars and crews to delay freight trains and lead to higher delivery costs for farmers across the country.

The demand for grain-hauling equipment is hot because the Farm Belt is humming after five years of recession. Grain prices are profitable for farmers in large part because corn and wheat exports have soared 24% since Sept. 1, a reflection of poor harvests this year in Europe and elsewhere. But there is a catch: Failure to deliver their goods is cutting into the potential profits.

That is because years of cost-cutting on both personnel and equipment have left railroads short-handed, forcing them to scramble to deal with the unexpected surge in both the agriculture sector and the economy in general.

Indeed, railroad delivery times for everything from lumber to containers of consumer products have started to climb. And that could eventually lead to higher prices for items ranging from breakfast cereal to cars.

"We are going to see logjams, bottlenecks and service disruptions as rail freight picks up with the rest of the economy," says Tom Finkbiner, a former railroad executive who is now chief executive of Quality Distribution Inc. of Tampa, Fla., the nation's biggest bulk trucking firm. He is also chairman of the University of Denver's Intermodal Transportation Institute.

The Farm Belt is feeling the effects of the train shortage most significantly because it is so heavily dependent on the railroads. About 40% of the nation's grain is transported by railroad, with most of the remainder being carried by trucks and barges. Also, the sudden surge of business caused by the autumn harvest across the Plains and Midwest tests the rail system as no other industry does.

The delays are sparking fears that bottlenecks might also arise in other sectors of the U.S. economy as they also get busier. But it is the Farm Belt that is feeling the pinch right now.

The price of a guarantee of on-time grain-train service, per car, as traded on a secondary rail market. Farmers in Reynolds, N.D., for instance, are still waiting for a train that was scheduled to arrive Nov. 1. As a result, the economy of the tiny farm town is slowing. Reynolds United grain elevator, owned by 300 farmers, has stopped buying wheat from growers because it can't move the 270,000 bushels it already has bought. The cooperative is dependent on Burlington Northern Santa Fe Corp., the second-biggest railroad, to haul its wheat to market.

"I've been in the grain business 25 years, and this is the worst delay I've ever seen," says Paul Coppin, general manager of the grain elevator in Reynolds.

Train delays are common during the harvest season. But this year the train shortage is far more severe, resulting in higher expenses for everybody from Washington state potato growers and Arkansas chicken farmers to owners of cattle feedlots in Texas. Some feed mills in the South are turning to trucks to keep their plants supplied with Midwest grain, a more expensive mode of transportation than rail.

The problems threaten to give the railroad industry a black eye just as it was poised to try to grab more business from trucks. Railroads unveiled new, faster schedules in the summer, and some public officials are showing more interest in funding rail projects that would remove trucks from congested roads.

Major railroads say they expect to get their service back on track by early next year, when parts of their business typically slow down after the Christmas season. Meanwhile, railroads are scrambling to hire more crews and secure more locomotives. Burlington Northern plans to increase its capital spending next year to $1.9 billion from $1.7 billion this year, as it expands track and acquires new freight cars.

CSX Corp. is making personnel changes and trying to make its trains operate more closely to schedule. Currently, CSX says that shipments on its system, which straddles the eastern third of the U.S., are lagging one to two days behind schedule, its worst performance since 1999, when its acquisition of Conrail lines temporarily snarled the system.

The condition of the nation's rail fleet has deteriorated in recent years, particularly so with grain-hauling equipment. According to Steve McClure, president of the rail-leasing unit of CIT Group, 68% of railroad-owned grain cars are more than 20 years old.

Burlington Northern, for instance, was caught off-guard by the record U.S. corn harvest and a bumper wheat crop. It had allowed its fleet of grain-hopper cars to shrink 24% over the past five years to 26,500 cars. Grain cars are now in such short supply that Burlington Northern has temporarily stopped guaranteeing when it will deliver any more to customers.

"We saw more growth than expected across the network, and that uptick in demand was packed into the back part of the year," says Steve Bobb, group vice president for agricultural products at Burlington Northern, which is based in Fort Worth, Texas.

In addition to equipment, the railroad industry is short of skilled workers. For example, Union Pacific Corp., the nation's largest railroad, didn't move quickly enough to replace retiring locomotive crews.

"We looked ahead and saw what we thought would be a pretty flat economy," says John Bromley, a Union Pacific spokesman. "But we were caught short of people as we got later into the year."

The farm sector's demand for trains this autumn is particularly strong, thanks in part to the need to move soybeans to ports for export to China, which is buying U.S. soybeans at a record pace for this time of year. The domestic appetite for grain is strong, too. A rebound in the consumer demand for beef is lifting cattle prices to record highs, spurring the feedlots that fatten them on grain to expand their operations. Much of the grain they use moves by rail.

"It is increasing costs all across the system," says Kimberly Vachal, a research fellow at the Upper Great Plains Transportation Institute at North Dakota State University.

Grain industry officials say the logjams are the worst since 1997, when railroad mergers left the Farm Belt in knots. The added expenses threaten to put a dent in the recovering agricultural sector. Some grain elevators -- the economic engine of many Plains towns -- are seeing their potential profits shaved by their limited ability to conduct business during the recent commodity-price rallies.

Four Burlington Northern trains have yet to show up at the MayPort Farmers Co-op elevator in Mayville, N.D., forcing the farmer-owned cooperative to dump about 400,000 bushels of corn and soybeans on the ground.

Transportation is a big part of the cost of making food, so the train shortage will help keep upward pressure on food prices already being pushed higher by rising cattle and crop prices. The Agriculture Department expects the Consumer Price Index for food to climb between 2% and 3% in 2004, compared with the 1.5% to 2.5% increase it sees for this year.

For the food industry, using the rails is getting more expensive in all sorts of ways. For instance, the charge for leasing one grain-hopper car for one month has doubled over the past six months to about $300.

Even the customers getting relatively prompt service are having to pay a lot more to make sure that happens. West Central Cooperative in Ralston, Iowa, is a priority for Union Pacific because the farmer-owned grain-elevator network is large enough to fill a 100-car shuttle train, the type of grain train that is most efficient for the railroad to handle.

But the premium the cooperative can pay above the basic rate to guarantee on-time arrival -- a price established through a secondary market much like the scalping of a sports ticket -- has more than doubled to $250 a car in recent weeks.

Dan Mack, vice president of rail transportation at CHS Inc., a diversified farmer-owned cooperative based in St. Paul, Minn., says he has seen the premium to guarantee timely train service on Canadian Pacific Railway Ltd. exceed $400 a car, compared with roughly $100 a car at this time last year.

Even when the train shortage ends, some costs will remain higher. Burlington Northern plans to raise its basic rate for hauling corn from the Northern Plains to ports in the Pacific Northwest by 8%, or $160, by February. Canadian Pacific says it is raising its rate for similar service by 8% to 10%.

"It galls people that they're putting in a rate increase when they can't perform with what they got," says Jerry Cope, transportation manager of South Dakota Wheat Growers Association, a farmer-owned cooperative based in Aberdeen, S.D.

Scott Kilmanand Daniel Machalaba, Staff Reporters
Railroad Logjams Threaten Boom in the Farm Belt
The Wall Street Journal, December 1, 2003

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