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Senators Lament Rail Logjam
Thursday, September 11, 2014 5:11PM CDT

By Katie Micik
DTN Markets Editor

WASHINGTON (DTN) -- Sen. Heidi Heitkamp, D-N.D., recounted a conversation she had with six farmers recently about rail freight service. Because of the disruptions, their cash corn price declined to $2.20 per bushel while their break-even price is around $4, a common occurrence across the Northern Plains these days.

The farmers estimated the extra transportation costs shaved about half a million dollars from their bottom line.

"This is about the very real economic consequences of what's happening in farm country," Heitkamp said. "What I am most concerned about is that we will be back here next year having the same discussion, but we'll have three years of disruptions. This isn't make-believe. This is real."

The Senate Committee on Commerce, Science, and Transportation held a hearing on freight rail service Wednesday that addressed the challenges shippers face from railroad delays. Several senators offered their back-of-the-envelope calculations of what the railroad backlog cost farmers; others cited university studies.

Sen. John Thune, R.-S.D., the committee's ranking member, said basis in parts of South Dakota is 28 cents weaker than last year. Given anticipated production, that's about $300 million out of his constituent's pockets. "And that's on top of low prices," he said.

Sen. Amy Klobuchar, D-Minn., pointed to a University of Minnesota study that argued rail disruptions cost corn, soybean and wheat growers in that state $100 million. In addition, the 330 million bushels of old-crop corn in the farmers' bins as of the June 1 stocks report is worth $122 million less because of the bottlenecks.

Jerry Cope, president of the South Dakota Grain and Feed Association and marketing manager at Dakota Mill & Grain in Rapid City, S.D., told senators progress is being made toward cutting the backlog.

"While this is great news, it is still a very serious situation," he said. "Needing a train every five days in order to clean out the backlog and get ready for fall harvest, but getting one every ten prohibits accomplishing either of those objectives."

He said elevators have 20,000 bushel to 200,000 bushel piles of wheat on the ground waiting to be shipped. With elevator storage full and no place to blend and clean the wheat, the grain from piles may not be marketable by the time it's sold.

Given the current pace of service recovery, "the backlog will continue and possibly even increase through next summer," Cope said. "There is no room for even a minor hiccup in rail service this fall and winter -- including weather, competing demand or anything else."

USDA anticipates grain production and grain stocks this harvest season will exceed permanent storage capacity by 694 million bushels, about 3.5% of the anticipated harvest and the largest discrepancy since 2010. South Dakota is expected to have 20% more grain than storage; Indiana and Missouri 15%; Kentucky and Michigan 7%; Ohio 6%; and Illinois 3%, said Arthur Neal, deputy administrator of USDA's transportation and marketing program.

While agriculture's struggle took center stage at the hearing, the testimony established that the rail issue is broader than agriculture and broader than North Dakota. The automobile and chemicals industries testified that they feel the pinch, too. The gridlock extends from the east coast to the west, as a senator from New Jersey emphasized.

On Monday, the committee's chairman, John Rockefeller, D.-W.V., and Thune introduced a bill to reauthorize the Surface Transportation Board, which oversees the relationship between the railroads and shippers. The bill expands the board to five commissioners from three, allows the board to initiate investigations instead of having to wait for a specific complaint and requires it to set up a database of complaints.

The bill also streamlines arbitration systems and makes adjustments to how rate disputes can be handled. The bill could be marked up next week.

"Certainly the rail business environment can be improved by implementing reasonable processes and rules to make it easier to bring justifiable grievances regarding rail services, as well as rates and charges, to a timely conclusion," Cope said. He stressed that no one wants more government regulations, but rather regulations that are up to date with the current railroad business model.

Consolidation reduced the number of Class 1 railroads from 26 in 1980 to only seven today, a statement from the American Chemistry Council said. From 2002 to 2012, rail rates increased more than 93%, about three times the rate of inflation. The Association of American Railroads countered that even after inflation, shippers are still paying less than they did in the 1980s.

Ed Hamberger, president and CEO of the Association of American Railroads, argued that even though some railroads are making record profits, the rates justified because of the need for continual investment in infrastructure. He said the railroads are planning to spend $26 billion on capital projects this year.

"I want to hear something more than we are investing a record amount this year back into our infrastructure," Rockefeller said. "Don't get me wrong, that is incredibly important for our nation's long-term economic prosperity, but we need all hands on deck to address this problem now.

"I believe the STB needs to change its fundamental perspective. We know that the railroads are financially strong. It is time for the STB to re-focus its mission on providing regulatory balance to support the businesses and people who use the rail network."

Katie Micik can be reached at Katie.Micik@dtn.com.

Follow her on Twitter @KatieMDTN.


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