Cold and slow: As rail issues hamper business, industry leaders want solutions
FARGO — Elevator operators are perennial critics of railroad service for hauling grain, but many say delays are worse than ever this winter.
The situation is bad enough that Sen. John Hoeven, R-N.D., called a meeting with the North Dakota congressional delegation and several officials connected to the issue on Feb. 11, in Washington, D.C., to discuss possible solutions for sugar beet, grain and passenger transportation interests.
Among those in the meeting were Matt Rose, executive chairman of BNSF Railway, Mark Watne, president of the North Dakota Farmers Union, Dan Wogsland of the North Dakota Grain Growers Association, and three sugar officials — David Berg, president and CEO of American Crystal Sugar Co.; John Doxsie, president of United Sugars Inc., which markets sugar for American Crystal and two other cooperatives; and Jim Johnson, president of the U.S. Beet Sugar Association.
After the meeting, Hoeven told Agweek that BNSF committed to bring into the region 125 locomotives on short-term leases, which could be in place in the next week. He said the railroad will also bring in 250 people off seasonal furloughs, as well as begin posting delinquent train deliveries to a website this week.
During 2014, the railroad will invest $5 billion into its railroad network in expansions and improvements — at least $600 million of that in North Dakota — and add another 500 locomotive and 5,000 grain cars, as well as 5,000 employees to maintenance, system-wide, including 250 in North Dakota.
Berg told Agweek that Rose talked about the surge in volume from all sectors — intermodal, crops, coal and oil — and said things will improve when temperatures are consistently above 10 below zero.
“With the weather forecast in the 20s in the next few weeks, it should help a lot,” Berg said. “That’s great to hear. But we don’t want to hear plans and projections; we want performance.”
American Crystal has had to slow deliveries at its Ardoch, N.D., facility. Berg said the coal movements have been “sufficient but not adequate,” and that the company is getting coal that is then trucked to its five plants, but inventory is low.
American Crystal had turned down the factory slice because it wasn’t able to ship sugar out fast enough to customers. It has since turned factory slice up at all locations but has “no breathing space” for storage, Berg said. He adds that the company has contingency plans to pile sugar in flat storage that would have to be reclaimed and put back through the factory.
“That’s not a good way to do it, but it’s better than discarding beets in the spring,” he said.
The region’s sugar beet companies aren’t the only ones in agriculture to be feeling the pain and certainly aren’t the only ones talking about it.
More than sugar
On Feb. 5, Daniel R. Elliott III, chairman of the Surface Transportation Board and Ann D. Begemann, vice chairman, wrote a letter to Carl Ice, president and CEO of BNSF in Fort Worth, Texas, to say they’ve been monitoring BNSF service data and are growing “increasingly concerned about the deterioration in service that is now occurring over significant areas” of the railway’s system. The STB officials say they would be meeting with BNSF officials to discuss the “serious matter” and copied Rose.
“These service issues appear to be negatively affecting agricultural, coal, passenger and other traffic, therefore, we request that BNSF review with the board the scope of these service problems and their severity, the underlying causes, and why BNSF has had such difficulty managing the increase in traffic it predicted it could handle in its August 22, 2013 letter to the board,” Elliott and Begemann wrote.
“Most importantly, we need to understand how BNSF plans to return to appropriate service levels and its timeframe for doing so.”
The STB officials say they’re hearing about delayed cars and lack of sufficient locomotive power.
“Average train speed on BNSF has trended downward since January, while total cars-on-line has increased. Yard dwell time has steadily increased since September. It also appears increased cycle times for certain types of equipment are contributing to rail car shortages, particularly with regard to agricultural traffic.”
They say it appears BNSF service problems are “unusual and already have had a serious impact on customers,” noting that “as a Class I carrier, BNSF has the experience and ability to improve this situation.”
Amy Casas, BNSF director of corporate communications, told Agweek winter weather with severe cold and snow in the north-central states has “significantly impacted our efforts to make service improvements for all of our freight customers,” adding the company is “grateful for the efforts that our crews and staff have put forward under these conditions.”
When asked about oil’s contribution to the problem, Casas said the railroad “experienced growth on our network in 2013 in places we didn’t anticipate, some of which we forecast and, frankly, some we did not.
“To put this growth in perspective, BNSF absorbed half of all the volume growth in the rail industry driven by domestic Intermodal, automotive and industrial products traffic, more coal volumes than had been forecast to BNSF, more crude by rail volumes driven by widened benchmark crude spreads, and a grain traffic surge in late 2013 driven by compressed and overlapping crop harvests,” Casas said. “The number of grain shuttle trains in service on BNSF’s network has also doubled in recent months. Crude volumes on BNSF increased in 2013, but so did every other sector of volume on our network.”
Service was also impacted in the short term when BNSF invested more capital dollars to improve and expand track capacity on the Northern Corridor than any other part of its network.
“Unfortunately, this surge in traffic volumes and significant track work put us in a position of catching up and working our way through the congestion,” Casas said. “There was incremental service improvement in late 2013, as our 2013 capacity expansion projects were completed. The continuation of those improvements has been limited by an extremely cold winter in the north-central region of our network.”
Effects of the cold
Extreme cold creates air brake problems for train movement and frozen switches that must be cleared manually, limits train speeds as a safety precaution and even limits how long rail workers can work in the extreme cold before warming up to protect their safety, Casas said.
BNSF has been working with freight customers on an individual basis to address their most critical service issues, she said.
“We are committed to an aggressive service recovery effort that is ongoing to restore service across our network to the levels our freight customers expect.”
Casas said there is “nothing systemically wrong with the system that cannot be corrected. BNSF believes agriculture products will continue to be a vibrant growth industry and we are investing and expanding capacity to support that growth.
“Of our $5 billion capital plan just announced for 2014, $900 million will be spent on the Northern Transcon(tinental Railroad),” she said. “These investments will provide long-term capacity to all our customers.”
1,000 cars behind
Brad Haugeberg, general manager of SunPrairie Grain in Minot, N.D., a CHS Inc. affiliate, said this is the worst delay he’s ever seen since starting in the business in 1975. His company works with both the Canadian Pacific Railway and BNSF.
SunPrairie typically averages 600 to 700 cars of freight a month in all of its locations, but now is about 1,000 cars behind. He said farmer-patrons sometimes ask why the elevator doesn’t simply order more in advance, but it would have to decide in August to “double-down” on orders for October. “You’d have to have a crystal ball to double-down.”
Haugeberg said the problem is that his company is trying to fill orders for ships in the Pacific Northwest that are paying $30,000 to $50,000 per day in demurrage.
“Those costs are passed downstream to shippers. That affects the amount we can pay on the (exchange) board. The grower pays the bill, and the railroad that is creating the problem pays nothing.”
Now, trains are generally six to eight weeks late and shuttle trains are taking priority.
“We still have lots of November non-shuttle equipment that we haven’t placed yet,” Haugeberg said. That hits the specialty crops such as flax, canola, sunflower, durum and barley.
Some maltsters and other processors are operating hand-to-mouth, within a few days of shutting down at any given time.
“The only answer is moving this crude (oil from the Bakken fields) in a different fashion, other than rail,” Haugeberg said. “You know the politics behind that.”
Farmers are putting up more of their own storage as a countermove.
“The railroads — or I would say ‘we’ — have disappointed them too many times. There’s some shiny steel (bins) out there,” Haugeberg said.
He has no solid figures, but he guesses farmers now have enough on-farm storage in his area to handle perhaps two-thirds of a crop. The big change has been an influx in corn, which makes more bushels than small grains or soybeans.
Delane Thom, regional manager for CHS-Southwest Grain, said the Taylor, N.D.-based company typically puts rail car orders in several months ahead of the anticipated need. Southwest Grain has three shuttle loaders that together handle 35 million to 40 million bushels of grain.
Southwest Grain has historically been within a few days of its placement dates. “Now, we’re experiencing delays of 30 days or more beyond that date,” Thom said.
Railroads pay contract fees for late-placement of cars, but they are small. “We don’t consider that to be a big deal,” Thom said. “We would much rather have the cars than collect any penalty.”
Mike Wedwick, Scranton (N.D.) Equity Exchange, said his elevator hasn’t been behind excessively. Non shuttle freight is six weeks behind but shuttle trains have been able to keep up, maybe a week behind.
One grain merchandiser in central South Dakota who asked not to be named said BNSF is “doing everything in their power to lose business” with slow turn-around times.
“You can load product on a train and it’ll sit for a week,” he said. He said his company is looking for alternative ways to get its product to market, but “that isn’t exactly easy.”
Meanwhile, he has to hold off customers who want to deliver grain but can’t because his elevator is full. “It affects what you can pay for it because you don’t know,” he said. “I don’t think they have enough people, and the people they have are dedicated to oil.”
For farmers, this means holding
grain longer than they’d anticipated, dealing with more challenging contracting periods.
“When are you going to sell it? At what time period do you want to deliver? Because the elevators are sitting full.
“At the customer level, we have not built enough to hold the entire crop,” he said. “We had a big crop in the 2013 crop year. That added more volume that we’d like to move, but we physically can’t move it.”
Thom said farmers are working to make room in their on-farm storage for a 2014 crop. He said he couldn’t “put a number to it,” but figures the delay in trains and marketing “is costing them something.”
A second impact is the premium elevators and farmers are paying for it.
The BNSF, as a common carrier, offers freight on its basic “tariff rate” for initial deliveries. Then it has a monthly primary market for freight, usually purchased by companies such as CHS, Archer Daniels Midland and Cargill, slotted mostly into a shuttle market. The trains of certain size and destination would come on a market and sell out in a few hours. Elevator companies can bid on them, but so can freight brokers, who buy them expecting to sell them later at a profit — something like a scalper with entertainment tickets.
CHS and other large freight users, including ADM, have facilities scattered around and buys the freight on behalf of affiliated elevators, and elevators can move it around. If one elevator in a group is desperate at 30 days behind schedule, a train can be shifted to an elevator that’s in less desperate straits — maybe five days late.
A secondary market then exists where the freight is traded among the brokers, usually at above the market price. It might cost the company less to pay a freight premium than it would to pay a late delivery penalty. If a regular freight rate is $400 per car, for example, the premium might be $4,500 per car.
“That amount doesn’t go into the pocket of the railroad, but into the pocket of the company that bought the freight to start with,” said Steve Strege, executive vice president of the North Dakota Grain Dealers Association. “It could turn around the other way, where they have to sell the freight at a loss.”
Thom said his company purchases its railroad transportation based on historical grain flow and its best projection of yield. It purchases freight six or eight months ahead of actual need.
He said the problem is ordering too much freight and then bearing unused freight costs if hit by a drought or some other disaster.
“We’ve never been in that position. Never,” Thom said. “We’re not a freight company. We’re here to buy farmers’ grains.”
Processors have a problem with both incoming and outgoing freight. American Crystal is one of them. Another is the North Dakota Mill and Elevator in Grand Forks.
Mill general manager Vance Taylor said he hopes the rail delays will subside soon.
“It looks like we’ll be in this situation for awhile,” Taylor said. “Better weather will help — I think.”
The state-owned mill has experienced shut-downs because of the rail car situation and those haven’t improved, despite BNSF efforts, Taylor said.
The mill made a $12 million profit in the past fiscal year. Half of that goes into state coffers and half goes into mill investments. Taylor couldn’t say what the delays will cost, or whether the amount would cut much into profits. About 25 percent of the incoming grain is typically shipped by rail, and some of that has been delayed up to a month. About 70 percent of the outgoing products go by rail, and some of that has shifted to trucks at additional cost, Taylor said.
“We’re kind of hand-to-mouth on cars,” he said on Feb. 11. “We haven’t had to shut down this week but we’ve been close. It’s a pretty tough situation — unprecedented.”